SPACs, or special purpose acquisition companies, have been some of the hottest stocks in 2020. But what exactly is a SPAC?
Also known as a “blank check company,” these entities raise money via public offerings and then use the proceeds to acquire or merge with an operating business. Blank check companies have been around for quite some time. However, this year has been a banner one for the space.
Why? You can chalk much of it up to the kinds of businesses SPACs have been targeting. Doing deals with privately held electric vehicle (EV), autonomous vehicle (AV) and online gambling companies, they are cashing in on investor enthusiasm for these fast-growing industries.
But, as we close the books and enter 2021, it may pay to be more selective. If the bubbles pushing these sectors higher start to pop, SPAC stocks could generally head lower over the next 12 months. However, that doesn’t mean it’s time to avoid blank check companies altogether. Instead, with company-specific catalysts that could help move the needle further, some top-performing SPACs have the potential to continue being winners in the coming year.
So, which names have room to run and for which ones should you take the money and run? Let’s dive in and grade the near-term prospects for 10 of 2020’s hottest SPACs:
- CIIG Merger (NASDAQ:CIIC)
- Draftkings (NASDAQ:DKNG)
- Fisker (NYSE:FSR)
- Hyliion (NYSE:HYLN)
- Opendoor (NASDAQ:OPEN)
- Luminar (NASDAQ:LAZR)
- Nikola (NASDAQ:NKLA)
- Quantumscape (NYSE:QS)
- Lordstown Motors (NASDAQ:RIDE)
- Velodyne Lidar (NASDAQ:VLDR)
Hot SPAC Stocks: CIIG Merger (CIIC)
CIIG has yet to close on its merger with United Kingdom-based electric bus maker Arrival. However, investors have been buying it up like it’s going out of style since the deal’s announcement back in November.
As a result, CIIC stock has surged more than threefold. Yet, despite the enthusiasm, it may be best to steer clear of this name for now. As our own Matt McCall wrote on Dec. 16, the issue isn’t with the SPAC itself. As McCall sees it, this is actually one of the higher quality names out there.
What’s the problem? With shares up more on the EV bubble than the underlying fundamentals of Arrival, this stock could take a big dive once recent investing trends reverse course. As such, those buying in today could be sitting on big losses after the deal closes in early 2021.
Plus, there’s no guarantee that this early-stage EV company — which plans to keep costs low by using “microfactories” — will live up to its sky-high expectations. If Arrival experiences some hiccups in the near-term, expect that to have an impact on this pick of the SPAC stocks.
Most of 2020’s hottest SPAC stocks have been the blank check companies acquiring EV makers. However, names targeting the online gambling space have been winners as well. This includes sportsbook operator DraftKings, which completed its merger with Diamond Eagle back in April.
Of course, it hasn’t just been the SPAC factor that’s helped DKNG shares rally as much as fivefold this year. With the online gambling megatrend now fully in motion, any stock with exposure to this fast-growing industry has seen tremendous gains in 2020 — for example, take the non-SPAC online gambling play Penn National (NASDAQ:PENN).
However, investors should still be cautious with DKNG as we head into the new year. Why? The bubbly nature of the space. Right now, people are willing to give Draftkings a premium valuation — with a price-sales ratio of 44 — due to its high projected growth in the coming years. If it falls short of that growth, though, expect a big pullback from today’s prices of around $48 per share.
That said — as states like New York mull over fast-tracking legalization to shore up their finances — this trend isn’t going anywhere. Other states like California have yet to legalize online gambling but could soon follow suit. And if the company’s performance in states like New Jersey and Pennsylvania continues to beat expectations, there’s plenty more room for DKNG stock to run in 2021.
Since completing its SPAC merger with Spartan Energy in October, Fisker shares have performed well for investors . For instance, thanks to the “Biden boost” in EV stocks shortly after the U.S. Presidential election, shares saw a nice rally just above the $20 level. But, with the election results no longer top of mind, shares have since dipped back down to around $16.
So, after the selloff, is FSR stock a great opportunity? With its flagship Ocean SUV not set to roll off the assembly line until late 2022, all bets are off as to whether this contender has what it takes to become the next Tesla (NASDAQ:TSLA). But — given the company’s asset-light approach — it may be able to thrive in what’s becoming a crowded market. With a contract manufacturing partnership with Magna (NYSE:MGA), the EV maker is taking a smart approach towards scaling up.
However, much of this potential is already priced into FSR stock. And the biggest risk here — like with Arrival — is that the EV bubble could burst in 2021. If that happens, expect this company to head back to prior price levels.
Put simply, with potential payoff so far down the road, it’s just not worth speculating in Fisker at today’s prices. Instead, waiting for an additional pullback towards its offering of around $10 may be the best move when it comes to this pick of the SPAC stocks.
Hyliion, which merged with Tortoise Acquisition, is another EV play that started trading in the fall. However, the overall interest in electric vehicle plays hasn’t been enough to keep this hybrid truck maker’s shares from heading lower in the months following the merger.
Trading at just under $40 per share in early October, HYLN stock has now fallen by more than half, currently changing hands at $16.71 per share. Some may see this big decline as a prime opportunity to buy the dip. Instead, I think entering a position today would be more like trying to catch a falling knife.
How so? As I discussed on Dec. 3, the “story behind this ‘story stock'” has left investors skeptical as to whether it can deliver. And that’s in both the near term and long term. One reason is the company’s use of “renewable natural gas” (R/CNG) to extend the battery life of its vehicles. R/CNG may be more green than it sounds on paper.
But — if battery technology catches up sooner than expected — Hyliion could get left in the dust, with trucks going straight from diesel to electric. That would eliminate the need for hybrid options. So, as it seems that neither the fundamentals nor investor sentiment is on its side, you should steer clear of this one of the SPAC stocks for now.
Formerly Social Capital Hedosophia II, this pick of the SPAC stocks from tech investor Chamath Palihapitiya just closed on its merger with iBuyer Opendoor. Disrupting the residential real estate space, the platform makes near-instant online purchases of homes possible and uses algorithms for pricing.
With a lower fee structure than traditional realtors, Opendoor makes its money from the spread between buying prices and selling prices. However, while the company has scaled up into a multi-billion dollar business already, will it be able to reach its $50 billion per year revenue goal?
It’s possible. Sure, OPEN is facing competition from incumbent real estate brokers as well as tech savvy peers like Zillow (NASDAQ:Z). But, given that home sales are a $1.6 trillion dollar industry, the company only needs to grab a modest share of the market in order to meet its ambitious goals.
So, should this be a name to put on your watch list for 2021? It’s valuation is a bit rich. However, Palihapitiya’s track record with his first SPAC — which acquired Virgin Galactic (NYSE:SPCE) — has many buying this name in hopes that it will also strike success. Even at today’s premium prices, the odds appear to be in your favor with OPEN stock. This pick is high-risk with high potential return.
Investor enthusiasm may be cooling off for EV stocks. However, thanks to recent news, momentum is picking up once again for AV stocks. So, while it doesn’t build AVs itself, lidar (light detection and ranging) maker Luminar stands to gain significantly as automakers accelerate the development of self-driving cars.
Lidar is a laser radar technology that makes self-driving cars possible. With the notable exception of Tesla (which uses camera-based systems), car makers are by-and-large looking to lidar to make their autonomous vehicles safe and viable.
That bodes well for LAZR stock. The company went public earlier this month via a merger with Gores Metropoulos. Right out of the gate, shares more than doubled after the deal closing. And, while the stock sold off in the weeks that followed, Apple’s (NASDAQ:AAPL) headline-making iCar news has sent shares once again surging towards prior price levels.
So, what’s the play now? There’s no question that demand for lidar technology is set to accelerate in the coming years. But, as InvestorPlace’s Mark Hake pointed out, valuation has gotten “out-of-control” for this pick of the SPAC stocks. With this in mind, it may be wise to take the money and run. You should sell into the current strength.
Tesla may be the top dog in the EV space. But its similarly named competitor, Nikola, is the one that got the ball rolling when it comes to EV SPAC stocks. Earlier this year, shares in the maker of hydrogen electric trucks went parabolic after it merged with VectoIQ in June.
After tripling in value in the weeks leading up to the deal’s close, NKLA stock rallied from around $34 per share to nearly $94 in a matter of days. After that, though, it was all downhill. Allegations of fraud resulted in the resignation of its founder, pushing the stock back down toward its pre-merger price levels.
So, is Nikola a buy after its rapid rise and fall in 2020? Sure, just a small amount of positive news could be enough to send this stock surging again. However, as this EV play appears to be more sizzle than steak, it’s best to steer clear and focus your attention on more solid contenders.
Previously known as Kensington Capital, this is another pick of the SPAC stocks that recently closed its merger deal. Quantumscape is an early-stage maker of solid-state lithium batteries for EVs. You could say the company is taking the old adage during a gold rush, sell shovels to heart. Its unclear whether legacy automakers, established names like Tesla, or recent upstarts will dominate the EV market. But, all of them are in great need of the latest, greatest battery technology.
However, while QS stock’s future looks bright, shares may have gotten way ahead of themselves. The stock rallied over 38% on Dec. 22 alone, just on Apple’s iCar news. In total, Quantumscape has jumped from its $10 per share offering earlier this year to around $102 now.
So, what’s the play for those looking at the stock today? Ahead of the deal, I considered shares to be a cautious buy. However, with shares getting way ahead of themselves, now’s the time to seize the opportunity and sell into strength. The company’s current valuation more than prices in its long-term potential.
Lordstown Motors (RIDE)
Next on my list of SPAC stocks is a company based in the industrial heartland of the United States. Lordstown Motors is disrupting the traditional pick-up truck market with its flagship Endurance EV. As I’ve said before, this electric truck contender has all the ingredients to become a long-term winner.
How? Between strong pre-order demand, ownership of its own facility and a solid indication that work trucks may be the first to fully switch to electric, RIDE stock has ample runway for years to come.
So, with all of this behind it, why have shares sold off since late November? Chalk it up to the near-term cool down in EV plays. Lordstown stock, having merged with DiamondPeak, was barely above its offering price shortly after the deal closed in late October. However, thanks to the election results, the EV bubble gained additional runway and shares soared to around $30 per share.
Yet, with the “Biden boost” no longer helping green wave stocks, shares have now sold off. In order to bounce back, Lordstown needs another round of game-changing news that will excite investors. I think that is on its way. With the company set to make great progress in 2021, consider the recent pullback as the prime time to enter a position in RIDE.
Velodyne Lidar (VLDR)
The last name on my list of SPAC stocks, Velodyne Lidar stock got off to a slow start after completing its merger with Graf Industrial on Oct. 1. But, with the excitement around AV stocks in full swing, shares are now up over 41% since the close of the deal.
Just like with Luminar, this lidar developer has massive growth potential as the world’s automakers invest billions into the development of autonomous vehicles. On top of AVs, the company is also targeting the “smart infrastructure” and commercial drone markets, too.
For now, though, Velodyne is all about the AV catalyst. As InvestorPlace’s Robert Lakin noted, the Apple iCar news is a large part of what’s driving the strong performance in VLDR stock and its peers right now.
So, does this mean that Velodyne has additional upside from here? Yes and no. On one hand, with trends firmly on its side, more game-changing news like the Apple announcement could be just around the corner.
However, while Apple is in talks with several lidar suppliers, it hasn’t said which provider it will choose for its new vehicle. Also, there’s a distinct possibility that the tech giant will wind up using lidar tech produced in-house. So, my call? Take Lakin’s advice and sell into strength.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.