The year 2020 has been a year full of surprises. One of the more interesting developments within the stock market is the rise of the special purpose acquisition company, or SPAC. These are entities that raise substantial funds and then go hunting for a private company to buy and take public.
SPACs have been around for a long time, but there has been a flood of them in 2020. Virgin Galactic (SPCE) helped to kick off the interest and then Nikola (NKLA) and a few others in the electric vehicle area helped to attract plenty of momentum money.
Currently, there are almost 200 "blank check" companies in various phases looking for a deal. The biggest is the Pershing Square Tontine Holdings Ltd. (PSTH) with a market cap of around $5 billion.
Hot money traders are intently focused on the SPAC sectors, because the best ones have made some huge moves once the deals are announced. Some contrarians see this as a fad that won't last, but comparisons to the internet bubble of 2000 aren't valid. This group would have to double or triple to be anywhere close to the level of speculation we saw in 2000.
One of the big differences is that most of the SPACs are not wildly overvalued. Back in 2000, the gymnastics used to value companies reached absurd levels. While there are excesses, they aren't outrageous at this point.
If you are looking for an area that is likely to stay hot into the end of the year, then SPACs are likely to be the place. I'll be discussing some of my favorites as they develop.
One of the great things about SPACs is that they help to democratize the IPO process. You don't have to be a well-connected institutional investor to get an IPO allocation. You just have to do your homework and work to separate the winners from the pretenders.
Maybe SPACs will turn out to be a bubble that puts a top in this market, but if they are, they probably have a long way to go before they implode.