Shares of companies going public via a reverse-merger with a special purpose acquisition company (SPAC), such as Landcadia Holdings II (NASDAQ:LCA), have been hot in 2020. On Sept. 10, LCA stock hit an all-time high of $19.28. But the shares are now at $13.
The initial run-up in price came after Landcadia announced in June that it was acquiring online casino Golden Nugget Online Gaming. Billionaire Tilman Fertitta, owner of the Houston Rockets and Landry’s, a Texas-based restaurant and entertainment company, set up Golden Nugget Online Gaming. In the coming weeks, the combined entity is expected to change its trading symbol to GNOG.
The online gambling market is projected to register a compound annual growth rate (CAGR) of 15.4% through 2025. As a result, LCA stock gets considerable trader interest.
However, unless you are a long-term investor with risk capital to spare, it may still be early to invest in Landcadia shares. Here’s why.
What To Expect From The Newcomer
There is no doubt that the online gamin industry is booming. For instance, there is now an exchange-traded fund (ETF) available for those market participants who would like to invest in betting sports, the Roundhill Sports Betting & iGaming ETF (NYSEARCA:BETZ). It does not currently have LCA as a holding.
However, several other names that investors would recognize are DraftKings (NASDAQ:DKNG), Flutter Entertainment (OTCMKTS:PDYPY), Penn National Gaming (NASDAQ:PENN) and William Hill (OTCMKTS:WIMHY).
Analysts have recently expressed several points of concern over the future of LCA stock. The first question mark centers around corporate governance issues regarding. As InvestorPlace contributor Matt McCall highlights, “Landcadia is a SPAC co-sponsored by Fertitta Entertainment. Both Fertitta Entertainment and Golden Nugget Online Gaming are owned by outspoken billionaire mogul Tilman Fertitta.”
InvestorPlace’s Josh Enomoto also warns potential investors that the spike in the number of new coronavirus case may not be positive for LCA stock. He says, “Interestingly, LCA stock and new daily Covid-19 infections share an inverse relationship.”
The other concern is regarding typical moves by SPAC reverse mergers. Most SPAC’s begin trading between a $8-$10 range. LCA stock also traded around $9-$10, following its initial listing.
Following the announcement of a reverse merger, the price usually has a run-up. In most case it doubles, or even triples. In fact, as we have noted before, LCA more than doubled to hit $19.28 on Sept. 10.
But not all companies that go public with a SPAC reverse merger become a success story. Share prices of those businesses, usually go below $10. It is too early to tell which way LCA stock will go in the coming quarters. After all, the deal between the two companies has not yet finalized.
Therefore, potential investors in SPAC companies should conduct due diligence on LCA stock as well as other reverse-merger companies they may buy.
The Bottom Line on LCA Stock
Online gambling, including casino games and live sports betting, is expected to grow steadily in the coming years. Investors in the sector may want to keep LCA stock on their radar screen. However, I don’t expect the share to make a big sustained rally up any time soon.
Creating shareholder value depends on a number of factors. The shares will possibly trade sideways and even come under further pressure in the rest of the year. Investors would need to be convinced about the long-term story of the company before a new leg up can begin. Therefore, LCA stock is only appropriate for portfolios that can spare risk-capital in return for a potential high reward.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.