7 Basic Strategies to Profit from SPAC IPOs  

SPAC IPOs - 7 Basic Strategies to Profit from SPAC IPOs  

Special purpose acquisition companies, or SPACs, are a legitimate way for companies to raise money and come public without the traditional IPO. Investors may choose from several SPACs on the market today.

Like with all investments, investors looking into this space need to have momentum strategies in place to capture the most upside while minimizing the downside risks. For example, if the buying momentum ends, investors will want to avoid holding an investment vehicle while everyone else is selling.

If you’re looking to get your toes wet in the SPAC space, here are seven investing strategies to consider after observing the success of many recent SPAC IPOs.

1. Just Buy the SPAC IPO

Superstar investors like Bill Ackman raised plenty of funds through SPAC IPOs. If the IPO starts strongly, the buying momentum will send the stock higher. A lot of the time, markets will not scrutinize the details of the underlying holding, so long as the price rises. For example, investors may head over to the Nasdaq website to review the latest SPAC listings. Once they start trading, momentum investors accumulating the SPAC. After all, 82 of them that went public this year raised a record of $31 billion.

DraftKing’s (NASDAQ:DKNG) 52-week low of $9.85 and a high of $64.19 shows how big a gain is possible when buying and holding a SPAC on an uptrend.

The stock is also a reminder that when sellers decide its value has peaked, others should lock in profits quickly. In October, DraftKings topped $64.19 only to close at $44.34 by the end of last week.

2. Sell Before Everyone Else Does

Nikola (NASDAQ:NKLA) could have taken on new highs, rivaling other electric vehicle companies in market capitalization. But when Hindenburg research accused it of fraud, the stock plunged and the chief executive officer quit. Although Nikola stock traded as high as $93.99 in June, the company had no fundamentals to support the potential revenue promised.

When the momentum on a SPAC turns negative, investors should sell the stock before everyone else does. Without a product ready to bring to market, Nikola only has the cash raised on hand on its balance sheet. It will not have anything to sell.

So, if the Nikola Badger is not a real product, it will face lawsuits from shareholders and will eventually get delisted.

3. Use Momentum Signals From Charts

Investors should not ignore commonly used signals from stock charts. The moving averages are a reliable and slow indicator for support and resistance levels. A support level is a price at which shares should find stronger buying. In theory, the stock should not fall below that support level average. For example, between May and June, Nikola stock never fell below its 200-day moving average. Conversely, in July, the stock broke down below that average.

In the last few months, Nikola’s 200-day moving average became a resistance line. And in the last few weeks, its 50-day and 200-day moving average both became a point of resistance.

Price alerts are also useful for reacting to a change in momentum. For example, if a stock rises more than five percentage points, the momentum trader may put a buy order on that day. That is a bet that other market participants are betting on the stock rising for at least a few more days. Conversely, if a stock falls by 5% or more intraday, the cautious investor may want to sell. The 5% change is only an example value. A less aggressive investor might set a smaller intraday percentage change to minimize losses.

4. Buy and Hold

Virgin Galactic Holdings (NYSE:SPCE) hasn’t exactly set the world on fire since the March pullback. After rebounding from its lows, the company has mostly traded in a narrow range between $15 and $20. Here, the lack of momentum suggests that investors should buy and hold the stock for the long-term. Markets are waiting for Virgin to start taking customers to space. But the company has not scheduled the SpaceShipTwo flight yet.

Uncertainties on when flights begin should hurt SPCE stock in the short term. But the patient investors will know it will eventually happen. And when it does, the company may start reporting revenues. This will attract investors again and will lead to positive momentum in shares.

5. Follow the Trends

In mid-2020, electric vehicle stocks attracted speculators en masse. First-time traders joined Robinhood and other free sites. Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) were just a few stocks enjoying plenty of buying activity. This lifted SPACs like Nikola. So, the EV trend raised the valuations of nearly all stocks in the sector. Investors could hold SPACs and EV stocks as they rode higher.

In September, buying momentum faded for the EV trend as the technology sector corrected. The trend is now neutral to negative, in this example. Now that it is fading away, momentum investors should leave the sector, looking for the next one.

6. Follow Companies Dedicated to SPAC

Investors may pick from only certain companies involved in SPAC listings. Renaissance Capital is “the IPO expert” that knows how to sell the listing. For example, Renaissance published an article about Churchill Capital (NYSE:CCIV). The company filed a $1 billion IPO.

Readers may become more comfortable with this idea by searching for coverage here.

Renaissance also has an ETF that invests in companies that went public in the last two years. The ETF invests in the companies that are the largest by market capitalization. With this ETF, investors are holding what happens to be technology companies benefiting from positive momentum. Zoom Video (NASDAQ:ZM) shares show no sign of losing bullish momentum. Similarly, Moderna (NASDAQ:MRNA) is not a SPAC, but it is in the ETF and it almost tripled in 2020. Renaissance Capital offers a pure-play opportunity for investing in newly listed companies. This is regardless of whether it is a SPAC or a recent IPO.

7. Pick Good SPAC Partners

Investors who are familiar with Social Capital’s Chamath Palihapitiya may want to buy his SPAC. The investor spent four years as an executive with Facebook (NASDAQ:FB). So, if Palihapitiya had the foresight to believe in Facebook all those years ago, he’s probably worth listening to now.

Together with Ian Osborne, the CEO of Hedosophia, the pair run Social Capital Hedosophia Holdings III (IPOC), among others. This blank check company seeks to invest in innovative and agile technology companies. Osborne is an entrepreneur and a businessperson.

IPOC raised $720 million by selling shares at $10. Previously, it planned to sell 60 million shares plus a warrant exercisable at $11.50. The revision is an example of the company’s know-how in pricing a stock security to maximize its demand.

The Social Capital Hedosophia family is now up to “VI”. On Oct. 8, it priced its IPO at $10 a unit. At 100 million units, the holding will raise $1 billion. It will list on the New York Stock Exchange under the ticker “IPOF.U.”

From the Securities and Exchange filing, investors will notice that IPOD, IPOE, and so on, are each separately incorporated companies. Furthermore, the filing explains the conflict of interest that may arise: “These entities, including IPOB, IPOC, IPOD, and IPOE, may compete with us for acquisition opportunities. If these entities decide to pursue any such opportunity, we may be precluded from pursuing such opportunities.”

For now, the potential conflict of interest is of low concern for the momentum investor. The market is flush with plenty of liquidity and investor interest seeking limited opportunities. Still, that favorable environment may not last forever. Investors should stay alert in watching out for sentiment shifting to the downside or liquidity drying up. If that happens, then investors will want to protect their gains by lowering their weighting in such shares. 

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. 


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