New York City venture capitalist Fred Wilson blogged about new stocks and special purpose acquisition companies (SPACs) recently. Wilson was generally complimentary of the newest trend in companies going public.
“[C]ompetition has emerged for IPOs. On the left has come direct listings. And on the right, we have SPACs. Now founders and CEOs and Boards have a plethora of options for moving from a privately held business to a publicly held business,” Wilson wrote Sept. 3.
According to Renaissance Capital, there have been 148 IPO filings year-to-date through Sept. 3, 111 pricings, and 84 SPACs. While it doesn’t indicate the number of direct listings so far in 2020, two well-known tech companies — Palantir and Asana filed direct listings at the end of August — a sign that the final four months of the year ought to be very busy when it comes to the listing of new stocks on the New York and NASDAQ stock exchanges.
- Duck Creek Technologies (NASDAQ:DCT)
- GoHealth (NASDAQ:GOCO)
- Rocket Companies (NYSE:RKT)
- Vasta Platform (NASDAQ:VSTA)
- Xpeng (NYSE:XPEV)
- Flying Eagle Acquisition (NYSE:FEAC)
- Gores Metropoulos (NASDAQ:GMHI)
- Hudson Executive Capital (NASDAQ:HEC)
- Kensington Capital Acquisition (NYSE:KCAC)
- Defiance NextGen SPAC IPO ETF (NYSEARCA:SPAK)
To make sure you get a little taste of these different IPOs, I’ve selected five SPACs and five traditional IPOs.
All 10 of the new stocks on this list are worthy of inclusion in your portfolio.
New Stocks to Buy: Duck Creek Technologies (DCT)
The software-as-a-service (SaaS) provider for the property and casualty insurance industry. It sold 15 million shares of its stock on Aug. 13 at $27 a share, raising $405 million in gross proceeds. Its shares gained 48.1% on its first day of trading. Since then they’ve cooled off slightly, down about 8.45%.
Once upon a time, I worked in the insurance industry. It makes the banking industry look advanced beyond its years. Any business that can help the industry pull itself out of the stone age is worthy of consideration.
Not sure Duck Creek’s the right buy, considering that Lemonade (NYSE:LMND), another tech-related insurance business, went public at the beginning of July at $29 a share.
Accenture (NYSE:ACN) created Duck Creek as a division of the consultant in 2013. In 2016, it sold 60% of the business to the private equity firm, Apax Partners. Post-IPO, Apax and Accenture owned 33.7% and 22.5%, respectively.
Over the past three years, sales have grown from $156.7 million in 2017 to $171.3 million in 2019. Losing a small amount of money, by increasing its customer base while also expanding its existing relationships, Duck Creek ought to deliver for shareholders over the next 3-5 years.
GoHealth provides individuals with a Medicare-focused health insurance marketplace that utilizes machine-learning algorithms to help people find the best insurance plan for their specific needs.
In business for 19 years, it has transitioned its focus from offering individual and family health products to Medicare-related products. With Medicare enrollment expected to grow by 16 million people over the next eight years to 77 million Americans, there’s an opportunity to help those people get better healthcare coverage.
On July 14, GoHealth sold 43.5 million shares of GOCO stock at $21 a share, above the IPO pricing range of $18 to $20. The IPO raised almost $1 billion in gross proceeds. It planned to use a big chunk of those proceeds to streamline its organizational structure.
In August, GoHealth reported a 71% increase in sales, to $127.1 million. Unfortunately, it saw a profit of $15.3 million in Q2 2019, turning into a loss of $22.9 million. That’s brought out the potential class-action lawsuits.
Since its IPO, GOCO stock is down about 32%.
From where I sit, the company’s adjusted EBITDA margin in Q2 2020 of 21.2% was only 200 basis points less than in the same quarter a year earlier. Unless it turns out that the management or directors misled the investing public, GOCO shares are 32% cheaper today than they were seven weeks ago.
Long-term, if you don’t have a problem with the above-average risk, this could turn out to be a diamond in the rough of new stocks.
Rocket Companies (RKT)
This IPO rewarded all of Detroit billionaire Dan Gilbert’s hard work over the years. As a result of the Aug. 5 sale of 100 million shares of Rocket Companies’ stock, Gilbert’s wealth rose to $34 billion, making him the 28th-richest person on the planet.
Not bad for a guy whose working life started with him delivering pizzas in his hometown of Detroit. Before the IPO, Gilbert was probably best known for owning the Cleveland Cavaliers of the NBA.
Although the IPO pricing was between $20 and $22, Rocket’s stock went out at $18. When a stock sells below the range, it’s often a sign of a lack of interest. Not so, in this case. RKT stock gained 19.5% on the first day of trading.
In the past five years, Rockets’ sales have grown by 35% to $5.12 billion. On the bottom line, its pre-tax income has slowed slightly, dropping 29% to $898.4 million.
Don’t be misled by the drop in pre-tax income over the years. Instead, consider its Q2 2020 performance, which saw adjusted net income increase by 996% year over year, to $2.85 billion.
The company’s mortgage platform has only scratched the surface. Dan Gilbert could be in the top 10 of Bloomberg’s Billionaires Index before you know it.
Vasta Platform (VSTA)
I’ve always been a big fan of Latin American companies. So when I saw that the Brazilian K-12 education company went public on July 30, selling 18.6 million shares at $19, above the IPO pricing range of $15.50 and $17.50, I just had to find out why VSTA stock has fallen by almost 19% in the month and a few days since its IPO.
First, here are a few details.
Vasta was spun-off by its Brazilian parent, Cogna Educaco (OTCMKTS:COGNY). Cogna Educaco’s roots date back to 1966. However, it was the October 2018 acquisition of Somos, a leading K-12 educator in Brazil, that pushed Cogna to create Vasta, a platform-as-a-service (PaaS) provider focused on the K-12 market.
While not a massive company in American terms — it had net revenues of 512.7 million Brazilian reals ($96.9 million) and 24.4 million Brazilian reals ($4.6 billion) in the six months ended June 30 — it is generating significant free cash flow. In the first six months, it had free cash flow of 140.3 million Brazilian reals ($26.5 million), converting 111.7% of its adjusted EBITDA.
That’s an excellent sign.
As Vasta continues to help Brazil’s K-12 private schools digitally transform, the education system there will benefit greatly. If you believe in doing well by doing good, Vasta’s an excellent choice for your portfolio.
After the Luckin Coffee (OTCMKTS:LKNCY) fiasco, I’m reluctant to recommend new stocks based in China. However, given Xpeng manufactures smart electric vehicles (EV), an industry that’s experiencing tremendous growth, combined with the fact that it’s been producing actual vehicles since November 2018, I think it’s safe to assume its business is legit.
The company expected to sell 85 million American Depositary Receipts (ADRs) in its Aug. 26 IPO. It sold 99.7 million at $15, well above the initial pricing of $11 to $13 a share. As a result, Xpeng raised gross proceeds of $1.5 billion.
What’s it going to do with the proceeds?
It plans to allocate 50% to research & development for its Smart EVs and technologies. Another 30% will go to sales and marketing to grow its sales channels, and the final 20% is for general corporate purposes.
You’ll notice there’s no debt reduction mentioned. That’s because it only has less than $300 million in short- and long-term debt backed up by $3.6 billion in total assets, including the $2.5 billion in cash from the IPO.
In the first six months of the year, it had sales of $141.9 million and an operating loss of $202.2 million. That’s down 26% from a year earlier.
From November 2018 to the end of July, it delivered 18,741 of its G3 SUV. In May of this year, it started production on the P7 sports sedan. It’s delivered just under 2,000 of those. It plans to launch a third sedan in 2021.
After the success of Nio (NYSE:NIO), you might want to give XPEV a closer look.
Flying Eagle Acquisition (FEAC)
At the end of July, I recommended 10 SPACs to buy as they grow in popularity. One of them was the sixth SPAC from the industry’s poster boys — Jeff Sagansky and Harry Sloan.
The IPO listed March 5, raising $600 million at the traditional SPAC price of $10 a unit. As is industry standard, a unit includes a common plus warrants to buy an additional share. In this case, shareholders got one-fourth of a warrant with four warrants needed to buy another share in the future at $11.50 a share.
“If an acquisition isn’t found within 24 months, the funds in the trust account would be returned to investors. But don’t worry. The chances are excellent that Sloan and Sagansky will find a target,” I wrote.
Find they did.
On Sept. 2, less than six months from raising more than half a billion dollars, Flying Eagle announced that it was combining with Skillz, a mobile games company, in a transaction that values the merger entity at $3.5 billion or 6.3 times its estimated 2022 sales.
“Skillz is expected to power more than 2 billion esports tournaments in 2020 and facilitate $1.6 billion in paid entry fees for games hosted on its platform,” Marketwatch reported.
With the mobile gaming market expected to more than double in sales over the next five years to $150 billion, it’s no wonder FEAC stock jumped on the news. It’s now up 28% since its IPO.
Like DraftKings (NASDAQ:DKNG), which is Sloan and Sagansky’s fifth SPAC, expect significant gains when Skillz’ stock goes live sometime in the fall.
Gores Metropoulos (GMHI)
Technically, I should omit this SPAC in my list of 10 new stocks, because it went public on Jan. 31, 2019. However, I will because it announced on Aug. 24 that it was combining with Luminar, a company that specializes in automotive LiDAR (light detection and ranging) technology.
The combined entity will have an enterprise value of $2.9 billion and trade on the NASDAQ under the symbol “LAZR.” Institutional investors are contributing $170 million in additional financing, which means it will have more than $570 million in cash on its balance sheet when the deal closes in the fourth quarter of 2020.
“Starting in 2022, Luminar’s hardware and software will be integrated into Volvo’s global vehicle platform, the foundation for their next generation of consumer vehicles. In parallel, Luminar’s technology will also enable a new benchmark for vehicle safety surpassing today’s advanced driving assistance systems (ADAS) with proactive safety features,” stated the press release announcing the combination.
To date, Gores Metropoulos has done six SPACs raising $2.5 billion in capital, some of it to go toward deals like this one.
In 2023, a year after the Volvo partnership goes live, Luminar’s expected to generate sales of $124 million. By 2025, revenues are expected to hit $837 million.
I like this one’s potential.
Hudson Executive Investment (HEC)
Like many SPACs, Hudson Executive’s units separated the common shares from the warrants 52 days after its IPO listing. That’s why it trades under the symbol “HEC” and not “HECCU,” as it did when it sold 36 million units on June 8 at $10 a share.
The SPAC is led by the founders of Hudson Executive Capital, an investment firm that was founded by Douglas Braunstein and Douglas Bernstein in 2015. The firm is limiting its search for a target to the fintech and healthcare industries.
Upon closing an acquisition, Hudson Executive Capital intends to buy $50 million of the SPACs units in a show of commitment to its combination. It plans to lean on its CEO Network of more than 30 top-notch current and former CEOs to find an undervalued small- or mid-cap public company in the two areas of focus.
It’s an interesting approach and could pay off handsomely for early investors.
Kensington Capital Acquisition (KCAC)
Its goal was always to find a business in the automotive sector or related to the sector in some way. The independent board includes Tom LaSorda, who is a former CEO of Chrysler and has more than 40 years of automotive industry experience.
On Sept. 3, Kensington announced that it was combining with QuantumScape, a company that’s developed solid-state batteries for use in electric vehicles. Backed by Bill Gates and Volkswagen (OTCMKTS:VWAGY), the combination has an implied value of $3.3 billion. As part of the deal, additional investors, including Volkswagen, are expected to inject more than $1 billion in cash to help fund its development.
QuantumScape currently has a partnership with Volkswagen to move toward the mass production of these solid-state batteries.
“Many believe the batteries are the next best power source for future electric vehicles. Compared with today’s lithium-ion batteries, solid-state batteries charge quicker and have a greater energy density, meaning vehicles can go farther with the same size battery pack. However, the batteries are extremely costly to produce,” stated CNBC contributor Michael Weyland on the news.
The whole point of SPACs is to back jockeys (investors), not horses (companies). Kensington CEO Justin MIrro (the jockey) has delivered the goods.
This one has opportunity written all over it. It will trade on the New York Stock Exchange with the symbol QS.
Defiance NextGen SPAC IPO ETF (SPAK)
The people behind the Defiance Next Gen Connectivity ETF (NYSEARCA:FIVG), an ETF that invests in companies benefiting from the move to 5G wireless technology, filed a preliminary prospectus July 31 with the Securities and Exchange Commission.
The ETF intends to track the performance of the Indxx SPAC & NextGen IPO Index. Here’s what the prospectus states about the index:
“The Index tracks the performance of the common stock or depositary receipts of newly listed initial public offerings (“IPOs”) over the prior 18 months and IPO stocks derived from Special Purpose Acquisitions Corporations (“SPACs”). SPACs are companies with no commercial operations that are established solely to raise capital from investors for the purpose of acquiring one or more operating businesses.”
To be eligible, a stock must have a minimum market capitalization of $250 million. Given the size of SPACs keeps going higher, the chances of most of these not being eligible seems small.
Investors should think of this ETF as similar to existing IPO ETFs, such as the Renaissance Capital IPO ETF (NYSEARCA:IPO). The big difference is that the companies included in the index (up to 80% weighting) combine with SPACs to become publicly traded as opposed to selling shares in a traditional IPO (20% weighting).
I would prefer to see it pick the SPACs before combinations happen, but that’s something to discuss for another time. That said, this could garner significant interest from investors who want an easy way to play new stocks like SPACs.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.