Sometimes the best time to look for new investment ideas are when things look their bleakest. Take SPAC-related stocks, for instance. The liquidation of an exchange-traded fund shows that investor sentiment can’t get much worse.
Shares of companies that raised capital and became publicly traded via a merger with special purpose acquisition companies are deeply out of favor. Rising interest rates is one reason. Higher rates have sapped some investor enthusiasm for more speculative high-growth ideas.
Companies deserve some of the blame for weak sentiment too. Many SPAC-related companies have failed to meet their lofty revenue projections.
Take Virgin Galactic (ticker: SPCE). Back in 2019, when going through its SPAC merger process, the space tourism pioneer projected 2022 sales of almost $400 million. Virgin Galactic still hasn’t begun commercial service.
And back in 2020, when Lordstown Motors (RIDE) was merging with a SPAC, management said it expected to generate about $1.7 billion in 2022 sales. The company is planning to deliver its first 500 units in the early part of 2023.
Those are two reasons for SPAC-stock weakness. There is another, less obvious reason for recent weakness. The liquidation of a SPAC ETF might also have added to recent declines by adding more sell orders into the mix.
The Defiance Next Gen SPAC Derived ETF (SPAK) is no more. It liquidated at the end of August.
Five notable SPAC-related stocks that underperformed over the past few days while the liquidation proceeded include EV maker Lucid (LCID), software provider Grab (GRAB), fintech firm SoFi Technologies (SOFI), biotech Cerevel Therapeutics (CERE), and media company Getty Images (GETY).
All five have underperformed the S&P 500 and Nasdaq Composite over the past week. The average decline of the five shares amounts to about 15% over that span. The underperformance amounts to about 11 percentage points.
Some of that decline might have been related to the SPAK liquidation. Looking ahead—for the coming few days only—it’s possible those five catch a bid just because the ETF-related selling pressure is over.
Investors should tread carefully though. Even with investor sentiment looking terrible, and the ETF liquidation a possible positive trading catalyst, the stocks aren’t in the bargain bin.
None of the five are expected to produce full-year profits in 2023, according to estimates aggregated by Bloomberg. The five trade for an average of about 4.5 times estimated 2023 sales. The Nasdaq Composite trades for about 2.7 times estimated 2023 sales.
Write to Al Root at email@example.com