Summary
- I've had a pretty bad history with SPACs, but recently more and more high-quality companies have listed using SPACs.
- Recently, I added FMCI, a company acquiring fast-growing, plant-based food company Ittella International, to my portfolio.
- Product pipeline and distribution are both in their infancy, yet the company is already quite profitable.
- Valuation is in line or cheaper than peers, and insiders are retaining a substantial amount of their past holdings.
I don't have a good history with SPACs, but after looking carefully into Forum Merger II Corporation (NASDAQ:FMCI), which was on the verge of acquiring a fast-growing, plant-based food company, I decided to once again dip my fingers into the SPAC space. I believe the combined company has the potential to become a massive player in the frozen food space over the long term.
My history with SPACs
Long-time followers may remember that I had bought SPACs before, with disastrous results. The first SPAC I bought, Exela Technologies (NASDAQ:XELA), is down 60% from when I started recommending it, and the second SPAC, Waitr Holdings (NASDAQ:WTRH), has become a multibagger, but only due to the COVID-19 pandemic. If not for the pandemic, the stock would likely still be languishing below $1 - in fact, I sold my position for a loss.
After the Waitr debacle, I swore at that time to stop investing in SPACs. Because of this, I stopped reading up on SPACs entirely and focused on other stocks. However, very recently, when SPACs like Virgin Galactic (NYSE:SPCE), Nikola (NASDAQ:NKLA) and DraftKings (NASDAQ:DKNG) started to skyrocket following the merger announcement, I once again became intrigued. Why had SPACs, which were notorious for poor stock performance, suddenly doing so well?
Even now, the answer is not clear, but my guess is that several factors came into play. The COVID-19 pandemic has left many companies cash strapped, and when the market rebounded in April and May, many private companies started looking into listing themselves. However, a traditional IPO could be quite time consuming and costly, so private companies started looking at SPACs in order to raise capital. The inherent advantages of using a SPAC led to more and more high-quality companies using this structure to list themselves.
With more and more high-quality companies listing by SPAC, investors have started to pile into the sector. When a SPAC announces an agreement with a merger target, it is not uncommon for the company to jump around 30-40%, especially if the merger target operates in a highly exciting industry like EVs, plant-based foods, or autonomous driving. The risk is also very low as investors can redeem $10 in cash for each share they own.
After I realized that SPACs were becoming more popular, I begin to selectively invest into SPACs. My first target is FMCI, which had recently announced a deal to acquire Ittella International that should close in Q3 2020 and form Tattooed Chef, a leading, plant-based food company.
