SPACs (special purpose acquisition companies) and meme stocks made numerous headlines in 2021 and continue to spark interest in investors in 2022. People have plenty of questions about SPACs: Are they a good investment? What makes them different from IPOs (initial public offerings)? And what exactly is a SPAC, anyway? These are all questions are worth asking.
However, as I’ve written in the past, I do not like SPACs in general. I consider them to be little more than a loophole to avoid having to deal directly with the Securities and Exchange Commission.
The SPAC Index
Investors interested in SPACs should pay attention to the S&P U.S. SPAC Index, which “is designed to measure the performance of a minimum of 30 common stocks of special purpose acquisition companies (SPACs) listed on U.S. exchanges.” interesting as a monitor tool of SPACs performance. The index launched on Aug. 23, 2021, with a value of 242.06. As of Feb. 25, it had climbed to 351.03. Statistics do not always tell the whole truth, though.
While the index as a whole might suggest good things about SPACs as an asset class, the story becomes more complicated when you look at individual stocks. Each of the following companies got a lot of buzz and the backing of celebrities, and each of them has been a tremendous failure for investors.
First, The Beachbody Company (NYSE:BODY), a health and wellness platform that was backed by Shaquille O’Neal, has a 52-week range of $1.50 – $13.50 and opened on Feb. 28 at $1.93, a loss of nearly 85% in the past year.
Velo3D (NYSE:VLD), a maker of metal additive three-dimensional printers that Serena Williams helped go public, has a one year loss of nearly 27% and a three month loss of approximately 30%. It opened on Feb. 28 at $8.
Jay-Z’s cannabis-focused SPAC, The Parent Company (OTCMKTS:GRAMF), is another SPAC that has performed poorly. The stock has witnessed an 86% plunge in the last year and is a penny stock trading at $1.44 a share as of Feb. 28.
How about 23andMe (NASDAQ:ME), a consumer genetics and research company backed by Richard Branson? Even serial entrepreneurs can go wrong in investing. Shares of 23andMe Holding have had losses of 61% in the past year.
Being a billionaire does not mean that you have the Midas touch when evaluating stocks and SPACs. For further evidence of that, look at Evolv Technologies (NASDAQ:EVLV), which manufactures and develops security screening products and was backed by Bill Gates. With a one year loss of 66%, it has been a flop.
SPACs Tend to Lose Value
As Kori Hale explains writing for Forbes, “SPAC investors are bearing the cost, which is an unsustainable situation. Although SPACs issue shares for roughly $10 and value their shares at $10 when they merge, by the time of the merger the median SPAC holds cash of just $6.67 per share.”
Fortunately, the SEC has taken notice of the popularity of celebrity SPACs and has warned investors that athletes and celebrities getting involvedt in SPACs does not eliminate their risks.
SPACs represent a quicker way to public markets for private companies. They are volatile and have two years to complete a merger. A ticking clock sometimes means that the companies involved don’t get the assessment they need. Treat any SPAC investment as speculative and remember that the odds will be stacked against you from the very beginning.
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On the date of publication, Stavros Georgiadis, CFA 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.