What is a SPAC Stock?
What is a SPAC Stock? Special purpose acquisition stocks or SPAC stocks are in the news often in 2021. These companies are also known as “blank check companies”. Early-stage companies that are privately held are now starting to choose this route to raise capital and become a publicly traded company instead of an initial public offering or IPO. The advantage for the privately held company is that it avoids the expense and time of an IPO.
As a small investor it is good to understand this part of the market. I am not suggesting that you invest in SPAC stocks as there are plenty of risks and share price performance can be poor. More on that below. However, SPAC stocks raised $83.4 billion in 2020 and have already surpassed that dollar amount through the first half of 2021. Some high-profile private companies including Virgin Galactic (SPCE), Draft Kings (DKNG), Fisker (FSR), and others have merged with SPAC stocks to become a publicly traded company. Due to their increasing popularity, it is good to understand SPAC stocks and what they are.
How Do SPAC Stocks Work?
SPAC stocks have been around for many years but were not well known until roughly 2019. There are four stages to a SPAC stock lifecycle: SPAC formation, SPAC IPO, acquisition search, and finalizing the acquisition.
A SPAC stock is formed by an investor team in a specific industry. The initial investors, which often include private equity and venture capitalists invest the original capital for so-called “founder shares” that is typically worth 20% or more of equity.
Subsequently, the SPAC stock will file for an IPO and become a publicly traded company. The cash raised by the founders is usually held in escrow. Once a SPAC stock goes public it usually sells “units” or shares that are typically $10 per share. These units include common shares of the stock and also fractions of warrants to buy common shares in the future. The SPAC stock now trades like shares of normal company.
The SPAC stock then has two years to search for a private company to acquire or merge with to bring the privately held company public. If the SPAC stock has not acquired or merged with a company in two years, then the cash in escrow is returned to the initial investors. However, the share price is subject to normal volatility when markets go up and markets go down.
Finally, the SPAC stock must make the acquisition by announcing it and then voting on it. Additional shares may be issued at this time. The acquired or merged company is now a publicly traded company sometimes with a new ticker.
Risk for SPAC Stocks
Some investors such Jeremy Grantham feel that SPAC stocks are speculation since they have less financial disclosure and regulatory requirements than a conventional IPO. Another large risk is that you do not know ahead of time which privately held company will be acquired or merged with. This is the reason why SPAC stocks are called blank check companies. The next risk is that 20% of the company is being given up to the initial investors for essentially free. Their main role is to find a suitable privately held company to acquire. Next, there is the risk of dilution to investors and shareholders if a large number of warrants are issued.
The SEC has also put out a warning about celebrity involvement in SPAC stocks.
Celebrities, from movie stars to professional athletes, can be found on TV, radio, and social media endorsing a wide variety of products and services. Sometimes they are even involved in investment opportunities such as special purpose acquisition companies, or SPACs, as sponsors or investors. Those celebrities may even be well-known professional investors.
However, celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors. Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.
Final Thoughts on What is a SPAC Stock
SPAC stocks are not for everyone due to the risks, and SPAC stocks are certainly not dividend growth stocks. However, it is often difficult to buy shares of a popular IPO for many small retail investors. Most of the shares in an IPO are allocated to institutional investors. Further, the stock prices of popular IPOs often jump in price on the first trading day and week. From that perspective SPAC stocks are democratizing IPOs. That being said, studies have shown that SPAC stocks may underperform the market. Another article demonstrates that investors have lost money on the majority of SPAC stocks and on average SPAC stocks have underperformed the market. I consider myself a long-term investor and I am focused on investing over trading so I will likely by wary of SPAC stocks.
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Chart or Table of the Week
Today I highlight the Dividend Kings as a whole. I have changed my data source for the Dividend Kings. I am also following the rules-based assignment to the Dividend Kings. This streak of dividend increases is based mostly on the ex-date or declaration date, whichever is longer. This has resulted in removal of Tootsie Roll (TR) as a Dividend King. Tootsie Roll’s streak of dividend increases is due to adjustment after its annual 103-to-100 stock split. I highlight the year-to-date returns for those seeking dividend growth stocks for research. The screenshot below is from Stock Rover*.
Dividend Increases and Reinstatements
I have created a searchable list of dividend increases and reinstatements. I update this list weekly. You can search for your stocks by company name, ticker, and date.
Dividend Cuts and Suspensions List
I updated my dividend cuts and suspensions list at end of June. The number of companies on the list has risen to 526. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.
There were three new companies to add to the list this past month. These three companies were DTE Energy (DTE), National Health Investors (NHI), and Gap (GPS).
Dow Jones Industrial Averages (DJIA): 34,870 (+0.24%)
NASDAQ: 14,702 (+0.43%)
S&P 500: 4,370 (+0.41%)
The S&P 500 is trading at a price-to-earnings ratio of 46.2X and the Schiller P/E Ratio is at about 38.4X. These two metrics up down this past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively.
I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued based on historical data. Note that we are near or over 40X and valuation levels near the top of the dot-com era.
S&P 500 PE Ratio History
Shiller PE Ratio History
Stock Market Volatility – CBOE VIX
The CBOE VIX measuring volatility was up about 1 point this past week to 16.18. The long-term average is approximately 19 to 20.
Fear & Greed Index
I also track the Fear & Greed Index. The index is now in Fear at a value of 37. This is down 7 points this past week.
There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.
Market Momentum is indicating Extreme Greed. The S&P 500 is 7.81% over its 125-day average. This is further above the average than normal over the past 2-years.
Junk Bond Demand is indicating Greed. Investors are accepting 1.99% yield over investment grade corporate bonds. The spread is down further from recent levels indicating that investors are taking on more risk.
Market Volatility is set at Neutral. The CBOE VIX reading of 16.18 is a neutral reading.
Safe Haven Demand is in Fear. Stocks have outperformed bonds by 2.84% over the past 20 trading days. This is close to the weakest performance for stocks over the past 2-years as investors move back into bonds.
Put and Call Options are signaling Fear. In the last five trading days, put option volume has lagged call option volume by 54.12%. This is amongst the highest level of put buying in the past two years.
Stock Price Strength is signaling Extreme Fear. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the lower end of its range.
Stock Price Breadth is indicating Extreme Fear as advancing volume is 1.12% more than declining volume on the NYSE. This indicator is near the lower end of its range over the past two years.
The IHS Markit US Composite PMI was revised down slightly to 63.7 in June, from a preliminary estimate of 63.9, as compared to May’s record high of 68.7. The growth rate and activity were still the second-fastest on record as new business and export orders continued to climb. Job creation subsided amid the challenges associated with hiring new employees. The employee shortage also constrained output capacity, as work backlogs rose at a record pace. Supplier price hikes and higher payrolls pushed input prices to the second-fastest rate on record. The increased demand allowed firms to partially pass on their costs to clients with the second-highest ever increase in average selling prices for goods and services. June’s output capacity was also strained by new order inflows as outstanding business was at its sharpest level in ten months. Business optimism improved to the highest level since November 2020.
The U.S Bureau of Labor Statistics Job Openings and Labor Turnover Survey, or JOLTs reported a record 9.21 million job openings as of the last day of May, from a downwardly revised 9.19M in April. This is the fifth consecutive month of increased job openings. The job openings rate was unchanged at 6%. Total hires decreased to 5.93M from 6.01M in May, while the hires rate came in at 4.1%. Increases came in other services (+109,000), state and local government education (+46,000), and educational services (+35,000). There were decreases in the number of job openings in arts, entertainment, and recreation (-80,000); state and local government, excluding education (-56,000); and federal government (-17,000).
The Labor Department reported slightly higher initial jobless claims for the week ending July 3rd. The seasonally adjusted initial claims came in at 373,000, an increase of 2,000 from the previous week’s revised level. The four-week moving average was 394,500, this is the lowest reading since March 2020’s 225,500 value.
Thanks for reading What is a SPAC Stock – Week in Review!
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If you are interested in an excellent resource for DIY dividend growth investors. I suggest reading my Review of The Sure Dividend Newsletter. Note that I am an affiliate of Sure Dividend.
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