The idea sounds a little crazy when you think about it, but it’s perhaps the hottest investment of 2020.
Say I tell you to give money to someone, tell them to pool it with money from a bunch of other investors … and then find a good company to buy. You might wonder what’s gotten into me.
And yet, that’s exactly what Special Purpose Acquisitions Corporations are. They’re called SPACs for short … and they’re also referred to as “blank check companies.”
Two things you must know about SPACs…
First, they are the new and improved way for companies to go public.
And second, they are one of the hottest investments this year.
Here’s why SPACs are the big thing right now, and I’ll even give you one to consider …
A Better Way to IPO
In this year of low interest rates and market volatility, the traditional way for companies to go public is even riskier than usual. It’s incredibly expensive, involves all kinds of paperwork and hype sessions, and can all be undone in an instant by market instability.
Think of companies that planned to go public in February and March when stocks plunged into a bear market faster than any other time in history.
SPACs are a cheaper, better, and less risky way to go public.
They are formed when the blank check company files for an initial public offering intending to use the money raised to buy or merge with an existing private company. The SPAC typically has two years to complete an acquisition or return the money. When a deal is completed, the private company is folded into the SPAC, which is already public. And presto … you have an IPO.
We’re not even two-thirds of the way into the year, and SPACs have already raised more than 2X all of 2019 — $30 billion versus $13 billion last year.
If you’re interested in a SPAC, make sure you’re investing with smart people. Big-name investors are increasingly turning to these popular investments, like hedge fund billionaire Bill Ackman. I’ve been critical of him in the past, but he recently filed to raise $4 billion in what would be the largest SPAC ever.
Richard Branson’s Virgin Galactic (NASDAQ:SPCE) went public via a SPAC and is now worth over $3.5 billion.
Billy Beane, the famed “Moneyball” baseball guru, started RedBall Acquisition (NYSE:RBAC-UN), which is looking for a company in the sports, media, and data analytics sectors.
On Monday, Executive Network Partnering began trading on the New York Stock Exchange. Former House Speaker Paul Ryan is the SPAC’s chairman, and the company plans to bring in about $300 million to acquire another company. No specific industry is specified.
Go for the Growth
That brings me to the next point. Ideally, you want a SPAC pursuing companies with hypergrowth potential. The good news is that a number of them are focused on the same hypergrowth trends that I am.
One particularly popular area is the massive disruption coming as we move toward Transportation 2.0, which will include both electric vehicles (EVs) and autonomous vehicles (AVs).
I’m all in on the EV trend and the incredible next-generation batteries that will power cars — and even airplanes — in the future. Several small EV companies are going the SPAC route to the publicly traded markets.
Spartan Energy Acquisition Corp. (NYSE:SPAQ) is merging with Fisker to develop a fully electric SUV called the Ocean. SPAQ doubled from around $10 to over $20 on the announcement before pulling back to current prices around $13.
Nikola (NASDAQ:NKLA) may be the most famous. It merged with VectoIQ Acquisition in early June, and the stock rallied from $10 to over $90 before coming back to current prices around $40.
Then there are autonomous vehicles. They’ll also be powered by revolutionary new batteries but drive themselves!
This week, a small LiDAR company backed by PayPal (NASDAQ:PYPL) co-founder and billionaire Peter Thiel announced it will go public on Nasdaq after merging with blank-check company Gores Metropoulos (NASDAQ:GMHI).
The company provides LiDAR technology to over 50 auto manufacturers around the world.
And a SPAC I like right now is also setting up to be a key player in AVs …
Graf Industrial Corp. (NYSE:GRAF) has been public for more than a year. It debuted on the New York Stock Exchange in late 2018 and raised over $250 million.
In early July, Graf announced it’s merging with Velodyne Lidar, a leading developer of LiDAR technology. GRAF popped on the news.
The merger is expected to close here in the third quarter. The combined company will retain the Velodyne Lidar name and trade under the symbol VLDR.
LiDAR is big in AVs. It is an acronym for “light detection and ranging.” Light pulses off surrounding objects — like other cars, pedestrians, curbs, etc. — and then returns to a sensor that calculates distance based on how long it took for the pulse to return. Repeating this process millions of times per second creates a precise, real-time 3D map of the surrounding environment.
We are in the infancy of AV deployment. Major automakers globally are developing self-driving cars and trucks. Given that it is in the pole position, Velodyne’s LiDAR technology has the makings of a big winner.
Disruption is one of my major themes for the Roaring 2020s. Trillions of dollars slosh around in major disruptions like Transportation 2.0 … and now SPACs. If you’re investing in SPACs, consider yourself at the forefront of the new IPO process. Look for more from me soon.
On the date of publication, Matthew McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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