It’s only February, but it seems like the huge popularity of SPACs will continue into this year. One SPAC drawing attention is Social Capital Hedosophia VI (NYSE:IPOF). In fact, IPOF stock is up nearly 50% from its opening price of $10 (That’s the standard opening price for a SPAC).
Going public with SPACs is cheaper and faster than using a traditional initial public offering (IPO). And because SPACs have cash on hand that they will provide to their target companies, there is less uncertainty for everyone concerned than with IPOs.
A SPAC can also be good for retail investors. Investors who buy the shares of a SPAC before it chooses a target are “going in blind.” However, in most cases, an investor can sell his or her SPAC shares if they don’t like the target it chooses. And, if investors do think the SPAC will be successful, buying its shares early will allow them to generate a higher profit.
However, investing in SPACs doesn’t always work out well for investors. If you’re not familiar with investing in SPACs , I encourage you to read what InvestorPlace contributor Josh Enomoto wrote regarding the risks of investing in them.
But this is an interesting time for investors, since many traditionally “safe stocks” are looking bubbly. So if you’re going to set aside some of your portfolio for speculative equities, IPOF stock could be a way to go.
It’s All About the Target
The success of a SPAC comes down to the company with which it chooses to merge. In the case of Social Capital Hedosophia VI, its target is not yet known. However, the SPAC is sponsored by venture capitalist Chamath Palihapitiya who has a strong track record of success with SPACs.
At this point, I’ll refer you to what InvestorPlace columnist Mark Hake had to say about Palihapitiya’s track record, which is quite good. It stands to reason that many companies will be interested in partnering with his SPAC. But Palihapitiya has not indicated which companies he is considering choosing.
But he has almost two years to find a target. And that makes the situation interesting for retail investors. As I mentioned at the outset of the column, the price of IPOF stock is high right now. That’s not unusual for a SPAC, but it does mean that investors believe that Social Capital Hedosophia VI will swing for the fences.
If Palihapitiya does hit a home run, IPOF stock will likely charge a lot higher. However a solid single may still do the job. But on the other hand, it may not be good enough. That’s the risk-reward situation that investors have to consider.
IPOF Stock Is Worth a Shot
Investors seem to be wrestling with two competing statements that are both difficult to refute. The first is that the market is filled with speculation that is adding volatility to stocks’ volatility. The second is that investors who are looking for a return on their capital have few other options other than buying equities.
And that’s why I see IPOF stock as a worthwhile investment. At a time when many equities are speculative, the risk posed by Social Capital’s SPAC seems reasonable.
When Palihapitiya announces his target, IPOF stock will most likely climb. As a result, it’s really important that investors buy IPOF stock before he announces his target.
However, every SPAC investment carries risk. You should make sure that any position you take in IPOF stock is in-line with your risk tolerance.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.