Spartan Energy Acquisition (NYSE: SPAQ) is rising on the possibility of acquiring EV maker Fisker. Initially, investors might think most EV companies are worth the investment. Especially, as Nikola, NIO, and Hyliion-SHLL provided some nice capital gains over the past few weeks. However, some investors today are trading off the EV hype instead of the financial and product fundamentals. Trading without knowing the full picture is dangerous. Because often institutions and other people trade off investor blindness. So today YIG, is going to breakdown the SPAQ stock and provide you with everything you need to know. Allowing every investor to make an informed evaluation on SPAQ and similar scenarios down the track.
Table of contents 1. Who is SPAQ? 2. Why is SPAQ surging and what is the bigger picture? 3. Everything you need to know before investing in SPAQ.
Who is Spartan Energy Acquisition Corp (SPAQ)
Spartan Energy is a Special Purpose Acquisition Company (SPAC). Does the word SPAC sound foreign? If yes then you have come to the right place. SPAC’s are companies that go public through an IPO but do not have a product for the market. A SPAC’s sole intention is to use the funds from the IPO to acquire a company. Often allowing smaller businesses who do not want to deal with legal headache of an IPO to go public. However, you might be thinking who would invest in a SPAC at IPO, they have nothing to offer?
The people who invest in SPAC companies are called Private Investment in Public Equity (PIPE) investors. PIPE investors are betting that the acquired company will grow in the future. If the SPAC cannot find an acquisition within two years , the company must return the capital to the PIPE investors. Thus, PIPE investors benefit if the SPAC acquires a high-growth company and has a safety net if no acquisition takes place.
Once the PIPE investors and the SPAC agree on a company, they acquire the business. The acquisition allows the PIPE investors and SPAC executives to own stock in the acquired business. Now, the PIPE investors can sell their stock in the new business after a certain amount of days. For example, Vector IQ (a SPAC) acquired Nikola Motors and took them public this year. After a certain amount of days, Vector IQ PIPE investors could sell their Nikola Motor shares. Ultimately, creating a potential sell-off if they decide to execute.
The SPAQ Fisker merger is the bigger picture.
Now that you have a solid understanding of the basics of what a SPAC is we can progress. If you would like to delve deeper into the finer details of a SPAC, which YIG suggests, then starting with this Harvard review might be a good start.
SPAQ announced on Thursday that they could acquire Fisker, a growing EV company. At the moment, many SPAC’s are competing for Fisker, creating a bidding war. However, considering SPAQ said they have almost “clinched” the 2 billion dollar deal, it was enough to bring out the bulls. Because EV evaluations are going through the roof. Thus, it only makes sense that the potential for Spartan Energy to acquire a rising EV company sends the stock price surging.
Does YIG believe SPAQ holds potential?
Before I start I am obliged to remind our viewers that this not financial advice but rather my extensive research on the topic
Short answer: SPAQ holds potential however you must understand the risks of each strategy before investing. (Opinion not advice)
Riding the SPAQ and Fisker Hype
SPAQ is now trending based on the possible Fisker merger, pure speculation. The investor backing will not go away until we hear an announcement confirming which SPAC is acquiring Fisker. Because humans are wishful thinkers, investors will believe the speculation to be true for the time being so they can make money in the future. In saying that, investing in SPAQ could provide a nice return. (opinion not advice) Especially if we use the rise of SHLL and Vector IQ as a benchmark. However, investors must understand that if another company acquires Fisker then your SPAQ investment will plummet.
Alternatively, investors could ride the hype of Fisker once they go public. Because in all honesty, that is where the extreme bullish activity lies. For example, investors were more bullish on Nikola than they were on Vector IQ. Thus, investors could avoid playing SPAC Russian roulette and wait until Fisker goes public. However, the Fisker euphoria could disappear quickly, as we saw for Nikola. So YIG stresses to investors riding the wave to set a modest profit target and a stop loss. Because being unrealistic will cause you to be burnt off a sell-off.
Investing in warrants
Some investors may wish to avoid speculative investments, and that is okay. Investing in SPAQ warrants is a possible way to not invest in the speculation. A warrant is where a company issues investors the right to purchase stock at a specific price in the future. Think of warrants as a mini-IPO.
However, here is where it gets interesting. Sometimes the warrant price is lower than the stock. Allowing investors to purchase a warrant (stock) and then sell the shares on the open market and make a profit. For example, a SPAQ warrant costs $5.25 at the moment, which is up 100% today. However, SPAQ is trading at $16.58 per share.
Some might be thinking but hang on both a warrant and a stock represent part of the company, how can they be different? To purchase a warrant, you pay a fee. The fee plus the warrant price usually makes the total warrant cost similar to the cost of one share. However, when a stock becomes overinflated, as we are seeing with SPAQ, the warrant plus the fee can actually be less than the stock price.
Shorting SPAQ and Fisker
If you are pessimistic about SPAQ and even Fisker down the track, you may want to short, go against the bulls. Investors can do this by purchasing a put option or selling a call option. On face value, shorting seems attractive. Especially as the Nikola hype eventually stopped and began a downward spiral. However, if the PIPE investors behind the scene know that the stock will decrease, they will start shorting early. Meaning the price of put options and fees associated will increase dramatically. Thus, if you are going to short getting in before every man and his dog does is imperative.
Overall there is value in each strategy. (opinion not advice) However, if you invest in SPAQ or Fisker make sure it reflects your investment interests and not that of financial institutions or popular social media opinions.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick Mcloughlin, Senior Manager of YIG.