Tech firebrand Chamath Palihapitiya is still looking for merger candidates for two of his six blank-check companies. But that hasn’t stopped the ace investor from filing for four more special purpose acquisition companies (SPACs), focusing on biotech.
Palihapitiya filed paperwork with the Securities and Exchange Commission (SEC) for Social Capital Suvretta Holdings Corp I (NASDAQ:DNAA), Social Capital Suvretta Holdings Corp II (NASDAQ:DNAB), Social Capital Suvretta Holdings Corp III (NASDAQ:DNAC), and Social Capital Suvretta Holdings Corp IV (NASDAQ:DNAD).
The Canadian-American venture capitalist is one of the main sources of strength behind SPACs. A once-obscure financial scheme, it became the new way to become rich during the pandemic. If direct listings were the most-talked-about way to debut in 2019, SPACs are the new direct listings.
Chamath Palihapitiya is often referred to as the “King of the SPACs.” He has brought several prominent names to the market via the investment vehicle. Although momentum has somewhat slowed down due to SEC increasing scrutiny on blank-check companies, SPACs can still lead to massive gains for your portfolio.
Sponsor and Target Industries Key Factors
But blank check companies are far from a no-risk way to invest in emerging sectors. The SPAC process circumvents the rigorous due diligence of the typical IPO process. As a result, it is prone to legal problems. Since 2019, 15 securities litigation cases were filed against SPACs, including five new cases during the year thus far.
Considering these factors, retail investors need to carefully consider two factors before choosing a SPAC for investment — the sponsor and targeted industries. On both these fronts, the freshly filed biotech SPACs are excellent plays for your portfolio.
But remember, exit your position before the ball drops. Long-term investment in these stocks is fraught with risk that an average investor often cannot stomach.
‘King’ Shifts Attention With New Biotech SPACs
Palihapitiya is the main player in the SPAC game, having helped the public debuts of Virgin Galactic Holdings (NYSE:SPCE), Opendoor Technologies (NASDAQ:OPEN), Clover Health (NASDAQ:CLOV), and SoFi Technologies (NASDAQ:SOFI).
All of these companies are armed with non-conventional business models. But now, Palihapitiya is shifting gears to focus on the subsectors of healthcare. Although the names are very similar, they all have very different targets.
The upsized DNAA will seek acquisitions in the neurology field, and DNAB aims to find a target in the oncology sector.
DNAC will aim for M&A deals in what the sponsor called the “organ space” — companies aiming to treat diseases of the heart, kidney, or endocrine system. And lastly, DNAD is looking at the immunology sector.
The new SPACs haven’t exactly taken Wall Street by storm so far. However, all four of these SPACs attracted better-than-expected interest in their IPO phase. They raised $220 million through selling 22 million shares at $10 apiece, exceeding the original target of at least $200 million each. That being said, all four SPACs have increased about 1% from their $10 IPO prices, as is somewhat typical until target names start to surface.
You can chalk that down to the SEC crackdown on SPAC transactions, cooling retail investor interest. After a record 109 new SPAC deals in March alone, things have come to a virtual halt due to SEC issuing accounting guidance that would classify SPAC warrants as liabilities instead of equity instruments.
But if you are a retail trader, then you can make money from these four stock picks. In terms of management and target industries, these companies have all the ingredients to create positive price momentum moving forward.
SPAC Investing Cycle
In 2020, there were 248 SPAC IPOs that raised a total of $83.4 billion, an average of nearly $336.1 million per IPO, according to SPACInsider, a six-fold in 2020 compared with 2019.
However, despite the dizzying highs, these stocks have faltered and burned investors pretty badly as well. In a recent report, a team of Goldman Sachs (NYSE:GS) equity strategists examined the stock performance of 56 SPACs that have announced mergers with target companies since the start of 2018.
According to the findings, SPACs tended to outperform the market over the month and quarter following their deal announcements, but post-merger, the new stocks tended to struggle.
Clearly, there is a pattern to SPAC investing that you can follow. Identify companies that have a strong management team and wait for the merger; after a SPAC has raised its financing, it typically has two years to make an acquisition.
Once a merger target is identified, the stock price spikes. But when the merger is completed, SPAC investors tend to dump the stock. So, the ideal time to take profits is before the merger completion. Later on, you can enter a position when shares are trading at a more reasonable price.
Palihapitiya promotes the “blank check” company as an innovation that “democratizes access to high-growth companies” while “dismantling” the “traditional capital market.”
In reality, these are very risky high-risk, high-reward companies. You can make a lot of money. But you can also end up burning through your savings. Nevertheless, due to Palihapitiya’s savvy and connections, the four biotech SPACs are better bets.
Doing Just Fine Even as the Bubble Grows
At this point, investors are obviously getting a bit wary of SPAC stocks. And rightfully so. A SPAC is just a pile of money with a ticker symbol. An investor puts in $10 and gets a share after public listing in return.
But unlike in a traditional IPO, even an unprofitable company can make ambitious projections about all the money it’s about to make.
As a result, it can lead to disastrous consequences.
For example, short-seller Hindenburg Research came out with a “forensic research report” that made harsh accusations of fraud against Nikola, a hydrogen-electric vehicle designer, and manufacturer, just three months after making its debut.
The fallout from Hindenburg’s report forced Nikola’s founder, Trevor Milton, to resign from his role as executive chairman. Meantime, the SEC is examining Hindenburg’s claims to determine whether Nikola may have violated securities laws.
Against this backdrop, almost all of Palihapitiya’s SPACs are still up since their market debuts. If you want to hold these stocks for just a short period of time, he is one of the only relatively safe bets in town. Holding any of these past the merger completion date is risky, considering the inevitable drop in prices.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.