Early September brought exciting news for investors in Kensington Capital (NYSE:KCAC) stock. The company is initiating a reverse merger with QuantumScape so that the latter becomes a public company. As a result, Kensington Capital stock has more than doubled in a matter of days.
How does this happen? Kensington Capital is a special purpose acquisition company (SPAC). In other words, it is an investment company without any operations of its own. A SPAC, like Kensington Capital, initially raises public funds for the sole purpose of acquiring a private company, like QuantumScape, which is a renewable energy firm and battery manufacturer.
This year has seen SPACs gain attention as alternative means of going public. Today, we will discuss what investors may expect from Kensington Capital stock in the coming quarters.
A Reverse Merger Initially Boosts Kensington Capital Stock
According to recent research by John Crabb, published in the International Financial Law Review, the increased number of reverse mergers via SPACs “demonstrates the continued evolution of the equities markets. … [The] SPAC is now a great way for a fund to deploy its capital, for the company’s management team to raise capital and for the public to have the opportunity to invest.”
Following its formation, a SPAC typically has two years to identify a potential target to take public, propose an acquisition to shareholders and acquire the company.
Most SPACs begin trading at a range of $8-$10. Similarly, Kensington Capital stock had its debut in mid-August, at an opening price of $9.95.
The share price of a SPAC usually goes up substantially after the merger announcement. The merger between Kensington Capital and QuantumScape was announced on Sept. 3. The same day, KCAC shares opened at $19.32. The next day, they hit an all-time high of $25.75. Following some brief profit-taking, Kensington Capital stock now hovers at $19.
In 2018, a third of the SPACs were in the energy space. This year is seeing a shift to other industries, namely technology and alternative energy firms. The KCAC reverse merger highlights the growing importance of electric vehicles (EVs), alternative energy sources and battery technologies.
The most recent filing with the U.S. Securities and Exchange Commission says upon the closing of the merger, the combined company will adopt the QuantumScape name. Shares will continue to trade on the New York Stock Exchange under the symbol QS.
What to Expect From KCAC Stock in the Short Run
Going public is one of the most important strategic decisions taken by private companies. Following the completion of the merger, the fate of a given stock depends on a plethora of factors. In the past, not all reverse mergers with SPACs have been successful. Many such companies eventually go below $10. Yet there are others that become quite successful.
Recent quarters have seen several high-profile SPACs such as DraftKings (NASDAQ:DKNG), Nikola (NASDAQ:NKLA) and Virgin Galactic (NYSE:SPCE). In the days that followed the initial reverse merger news, all were higher than their opening prices.
However, they have all come off their all-time highs.
It is possibly too soon to tell how the price of Kensington Capital stock will ebb and flow in the coming months. Management and members of the board at Kensington Capital have decades of high-level experience both in the auto industry and investment management.
Similarly, C-Suite executives at lithium-metal battery maker QuantumScape have impressive resumes. As importantly, the company has the backing of Volkswagen (OTCMKTS:VWAGY), Continental (OTCMKTS:CTTAY), SAIC Motor, Qatar Investment Authority and Bill Gates. In fact Volkswagen has backed the company since 2012. QuantumScape centers around improving the range, charge time, life, safety and cost of lithium-metal batteries.
Kensington Capital stock may need several quarters before creating substantial shareholder value. However, partnering with established auto industry and investment management peers increases the company’s chances of success. For now, management is likely to focus on technologically improving and producing batteries.
The Bottom Line
The recent merger has made Kensington Capital stock one of the latest among publicly traded alternative energy companies. Market participants believe the next-gen battery sector offers a fairly untapped opportunity for this new decade.
In the rest of the year, many investors will possibly be happy to go along for the ride with Kensington Capital stock. I expect the ride to be choppy, but with a long-term upward bias. Short-term traders should exercise caution as moves in the company will likely be speculative and news-driven. Investors with a two- to three-year horizon may consider buying the dips in KCAC shares.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.