It’s been about two-and-a-half months since Gores Holdings IV Inc., a special purpose acquisition company (SPAC), merged with Pontiac, Michigan-based UWM Holdings (NYSE:UWMC), the number one wholesale lender of residential mortgages in the country. Since then, UWMC stock has lost 33% of its value through Apr. 2.
Across town at Rocket Companies (NYSE:RKT), who’ve provided more than $1 trillion in residential mortgages in its 36-year history, the company has generated a 25% return since its initial public offering in August 2020.
It appears that UWM Holdings is suffering from the SPAC curse. Am I right? Or, is there something else happening that’s sending UWMC stock trending downward?
Let’s consider the facts.
UWMC Stock and the SPAC Curse
Bill Gates told CNBC on Apr. 2 that he was avoiding many of the “low quality” SPACs that he felt were taking companies public way too early.
“There will be quality companies that SPAC, and there will be low-quality companies that SPAC, and I am going to try and stay involved in the higher quality ones,” Gates said.
It seems obvious, yet investors are piling into all kinds of SPAC IPOs that offer little more than a sketchy plan as to what they’re going to buy.
According to SPACInsider, there have been 298 IPOs in the first three months of 2021, raising an average of $326.6 million per IPO. In 2020, there were 248 for all 12 months, raising an average of $336.1 million.
In 2021, SPAC IPOs have raised gross proceeds of $97.3 billion, $14 billion more than for all of 2020. Yet only three combinations have been announced out of 295 that are searching for one.
It appears that SPACs are trying to climb a really steep hill. Investors are going to continue to be disappointed by the quality of combinations that occur. Either you’re going to get startups that are really green and years from a commercialized product or privately-owned businesses that get dressed up for their big coming out, but deep down, we know they were duds all along.
There is plenty of data that shows SPAC performance is terrible. Further, it’s unlikely that even high-quality SPACs will be able to gain enough traction due to the sheer numbers looking to gain investor attention in 2021 and beyond.
That, in itself, puts UWMC behind the eightball.
What are UWM Holdings’ Prospects?
UWM stands for United Wholesale Mortgage. CEO Mat Ishbia appears on CNBC’s Mad Money toward the end of March.
In Ishbia’s conversation with host Jim Cramer, the CEO defended his decision to stop working with mortgage brokers that dealt with Rocket Companies’ Quicken Loans and Wisconsin-based competitor Fairway Independent Mortgage.
Ishbia argued that he made a move to protect the broker channel and the consumer by extension.
“The reality is, brokers are all in,” Ishbia told Cramer. “They understand that Mat and UWM is here to protect the broker channel and consumers because consumers get lower rates when they go through a broker. That’s not an opinion, that’s a fact.”
It sounds like the two largest mortgage lenders in the country are ready to go to war. It’s definitely something to keep an eye on.
Gores merged with UWM Holdings because it felt that the wholesale mortgage company was the best potential target for shareholders’ future appreciation. Although it’s yet to work out that way, there’s no question United Wholesale Mortgage has growth opportunities ahead of it.
On Feb. 3, UWMC reported Q4 2020 results. In fiscal 2020, it had $4.9 billion in revenue, up from $1.3 billion a year earlier. The $182.5 billion in residential mortgage loans generated in 2020 resulted in $3.4 billion in net income, up from $415.1 million a year earlier.
It expects to close between $52 billion and $57 billion in loans in the first quarter of 2021, at least 22.6% higher than a year earlier.
The Bottom Line
As I write this, UWMC stock is trading around $7.75, well down from its 2020 IPO price of $10. Trading at 8.7 times its forward earnings, buying its shares, even as a speculative play, is probably a better move than buying some of these SPAC shells looking for a dance partner.
The struggles SPACs face are only going to get together, whether through greater disclosure requirements, tighter rules for sponsor shares, etc.
In my opinion, UWM Holdings makes a strong case that a bird in the hand is worth more than two in the bush.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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