SPAC Attack- Lessons learned- Don’t Invest in SPACS as they can be hazardous to your health.

According to Investopedia, A special purpose acquisition company (SPAC) is a company that has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with an existing company. Also known as “blank check companies,” SPACs have been around for decades, but their popularity has soared in recent years. In 2020, 247 SPACs were created with $80 billion invested, and in just the first quarter of 2021, a record $96 billion1 was raised from 295 newly formed SPACs. By comparison, only two SPACs came to market in 2010.

I’ve been monitoring insider behavior and how it impacts stock prices for about as long as anyone out there.  I haven’t seen much that shocks me or changes my perception of the usefulness of this information.  Now I have.  Normally significant insider buying will put a floor on a down-trending stock.  That’s changed with SPACS.  No matter how encouraging the news is or robust the insider buying is, when you have big shareholders waiting in the background to hit the bid, it’s killing the investment.  This is what’s likely happening to Cano Health and other good companies that have gone public through the SPAC process.

Going public through a SPAC rather than the traditional process should not be inherently different.  In reality, it seems to be night and day.  I analyzed a list of companies that have merged with a SPAC provided by Stock Market MBA.  Out of 230 companies, the average company that went public this way is down 54% from their high. In case you’re wondering if the math is misleading, the median company is down 58%.

In the normal IPO process, founders might be restricted from selling their shares for a few months after the IPO but in reality- they are mentally and emotionally invested in their companies and many don’t sell substantial amounts of shares for years.  This is how they accumulate great wealth. On the other hand, SPAC investors have no emotional attachment, no real belief other than the power of the almighty dollar.  They are anxious to get out and move on, just like private equity investors. In fact, many of them are the same avarice snakes in the grass.  The hard lesson learned- Don’t buy a SPAC regardless unless you have reason to believe the big sellers are gone.  They can be hazardous to your financial health.