As a general rule, I have stayed away from SPAC stocks. Companies that have chosen that route to market have usually done so for a reason, and all too often the reason seems to be that their financials wouldn’t pass the rigors of pre-IPO analysis by major Wall Street banks. Still, they often have obvious, appealing stories and are involved in trendy industries, such as EVs, space exploration, or advanced concepts in healthcare. That has ensured lots of early interest and often a spike, but reality has usually caught up at some point.
That description pretty much fits Stem, Inc. (STEM), but in this case, I am making an exception.
As you can see, the chart is pretty typical foe a SPAC stock, with a massive jump then a steep retracement, but the recent bounce back looks justified right now.
That is in part because, this morning, Goldman Sachs initiated coverage of STEM, with a buy rating and a $30 initial price target. Goldman is not infallible and does get things wrong, but they are the first of the major firms to apply their analysis techniques to Stem and, given that others will probably follow, that is an encouraging outcome.
As I said, the story behind these SPAC stocks is often appealing and STEM fits the bill there too. They are a clean energy storage expert, and thus fill one of the biggest voids in the push for renewable energy. The old criticism of wind and solar power is neither the sun shines nor the wind blows 24/7/365, and even when they do it is at an inconsistent rate. That creates a problem in energy, where demand is always there but fluctuates considerably.
The answer to that problem has always been storage to some extent, but also efficiency of transmission, and on neither front has there been much progress until recently. STEM offer solutions in both areas to producers and consumers alike that make the transition to renewable energy both cheaper and easier.
There are risks, of course, not least that STEM has never yet made money and has been bleeding cash at an accelerating rate. Goldman, however, seen rapid revenue growth continuing and the proceeds of the SPAC merger will have eased cash flow concerns for a while.
The other principal risk is that now that the good news is out and the stock has popped close to 10%, all the upside is gone. However, just having one of the big Wall Street firms cover the stock, and definitely with a ‘Buy” rating attached, lends a level of respectability that will prompt some institutional buying that will continue for a while, making that $30 target look well within reach, and quickly too.
So, the idea is to buy STEM at market (In my case it was at $24.20).
Usually I set a stop immediately, but I want to see how the stock behaves tomorrow after such a big up day, so I will hold off on that for now, but the initial target to the upside will be that $30 level.