The stock market ended the shortened Christmas week with a strong gain, leaving the Nasdaq Compound (NASDAQINDEX: ^ IXIC) at record levels and helping the S&P 500 (SNPINDEX: ^ GSPC) and Dow Jones Industrial Average (DJINDICES: ^ DJI) add to your returns for 2020. With just a week before the end of the year, US markets are on track to record a major victory.
|
Index |
Percentage change |
Change of stitch |
|---|---|---|
|
Dow |
+ 0.23% |
+70 |
|
S&P 500 |
+ 0.35% |
+13 |
|
Nasdaq Compound |
+ 0.26% |
+34 |
Data source: Yahoo! Finance.
Many were surprised by the stock market’s performance this year, especially considering all the challenges of the COVID-19 pandemic. A source of big gains has been the market for special purpose acquisition companies, or SPACs.
Even today, SPACs were among the biggest winners, and the stock price increases that investors saw did not always seem to occur for good reason. Next, we’ll look at whether investors should be concerned with the performance of special-purpose acquisition companies and what that might mean for the broader stock market.
SPACs are rising in the sky, but will they fall back to Earth? Image source: Getty Images.
Big gains for SPACs on Thursday
Nowadays, it seems that SPACs routinely appear on the list of the best in the stock market. Today was no exception:
- RMG Acquisition (NYSE: RMG) skyrocketed 19% as SPAC shareholders were preparing to meet next Monday, December 28, to approve their proposed transaction with the parent company of lithium-ion battery specialist Romeo Power Technology.
- Bridgetown Holdings (NASDAQ: BTWN) rose 12% on speculation that SPAC, backed by Peter Thiel, may choose to merge with Tokopedia, an Indonesian e-commerce startup.
- Acquisition of Thunder Bridge II (NASDAQ: THBR) rose more than 7%, boosted by the announcement last week that it would merge with automotive chip maker and software company Indie Semiconductor.
Across the market, interest in SPACs has been at a feverish pace recently. There is no shortage of SPACs still looking for smart candidates for acquisitions, and more special-purpose acquisition companies go public every day to try to claim their share of the business flow.
Every move you make, investors are watching you
However, there is a worrying trend in the SPAC world that suggests that investors don’t really understand everything about how they work. Consider some examples.
First, SPACs often see their stock prices rise after shareholders vote to approve previously announced mergers. However, this is not really new news, because if the SPAC share price is above SPAC’s initial offering price – usually $ 10 per share – then it is a foregone conclusion that investors like the deal and it will be approved.
Second, many SPACs increase when they change their symbols to reflect the name of the acquired target company. This is silly, since there is no economic substance for this change. Still, it suggests that many investors don’t think they can buy SPAC until the deal is completed – and these investors often miss the opportunity to obtain a more favorable purchase price.
Finally, many investors do not understand the interaction of SPAC’s shares, guarantees and units. Often, you can trade all three instruments with any single SPAC – but their prices don’t always move in sync.
Be smart with SPACs
Investing in a SPAC as soon as you find a merger candidate is like investing in a company before it becomes fully public. Investing in a SPAC before finding a target company means betting on SPAC managers to find a suitable acquisition.
The only really important news for a SPAC is when it makes a deal with a target and closes the deal. Everything else is usually just noise. The fact that SPAC investors are maddened by so much insignificant news is a worrying sign of foam in the stock market. Smart SPAC investors will be careful to choose the best prospects for their investment capital.