Special purpose acquisition companies (SPACs), also known as blank check companies, raise money through initial public offerings (IPOs) to acquire other businesses. According to SPACInsider, there were just 59 SPAC IPOs in 2019. In 2020, there were 248. And as of March 15, 2021, there have already been 258 -- this is clearly one of Wall Street's hottest trends.

Many of the headline-grabbing SPACs trade at hefty valuations, and that has kept me on the sidelines in terms of investing. However, restaurant SPACs are flying completely under the radar at the moment. This makes them potentially tasty value stocks in an otherwise pricey market. 

Limited downside risk

SPACs typically go public at about $10 per share. Let's say a SPAC sells 25 million shares in an IPO. In this case, it has $250 million to make an acquisition (excluding IPO fees and any accrued interest). This is known as the company's net asset value (NAV).

Unlike prominent SPACs, many restaurant SPACs trade near or even below NAV. With FAST Acquisition Corp. (NYSE:FST), I purchased units below NAV, mitigating my downside risk. Additionally, with SPACs, units eventually (typically 52 days after IPO) separate into two different assets: common shares and warrants. The warrants are basically five-year call options, allowing holders to buy common shares at $11.50 each at a future date. 

Once FAST units reached their separation date, I sold the common shares for the same price I paid for the units. This strategy allows me to continue holding FAST warrants at no cost. It's a low-risk strategy I would use again with restaurant SPACs, like the upcoming Sizzle Acquisition Corp. IPO. 

With pre-merger SPACs, it's impossible to have a long-term bullish thesis because you don't know what the final business will be. And indeed, in the case of FAST, I wasn't excited with its eventual acquisition of Fertitta Entertainment -- I had hoped for a fast-casual chain instead. However, since I got in below NAV, it wasn't a risky investment on my part.

Intriguing business targets

Even restaurant SPACs with more exciting prospects than Fast still trade at compelling values. Consider USHG Acquisition Corp. (NYSE:HUGS.U), which has restaurateur Danny Meyer on the team. Meyer has launched many successful restaurants in his career, including Shake Shack. He's also a proponent of conscious capitalism, advocating for all stakeholders in his best-selling book Setting the Table. 

As Jonathan Maze of Restaurant Business points out, there's a limited number of restaurant-chain candidates to take public, which could lead to a bidding war. This risk acknowledged, among Technomic's top 50 chains, I'd personally be excited to see Panda Express, Five Guys Burgers and Fries, or Raising Cane's Chicken Fingers go public. A Meyer-led USHG could potentially make one of these good chains even better, giving this stock great potential to beat the market in the long term. 

USHG management has a track record of success and a commitment to consciously capitalistic values. Therefore, if I could only bet on one pre-merger restaurant SPAC, it would be USHG. Furthermore, the units still trade at a great bargain right now at $10.26 -- just a hair above NAV.

Clear incentive for growth capital 

Finally, remember that the SPAC market is hot. I fear this creates a conflict of interest in some cases -- poorly run companies in need of capital can go public simply because the demand for SPACs is there. However, even financially sound restaurants have a clear reason to look for more cash right now.

The COVID-19 pandemic hurt the restaurant industry and forced many bankruptcies. This unfortunate reality has actually created white space on the map. Now that the restaurant industry is recovering, healthy companies have a window of opportunity to expand with atypical speed -- if they can fund it.

Take BurgerFi International (NASDAQ:BFI). The 117-location better-burger chain has a growing presence in Florida, but little recognition elsewhere. However, this small-cap stock has two big things I look for in a restaurant investment. First, it's profitable -- we're waiting on official 2020 results, but net income was $2.8 million in 2019. Second, it has high sales per location (known as average unit volume) of $1.4 million. I can't wait to see more detailed financials in time (SPAC mergers don't show everything), but these two factors suggest BurgerFi can scale well from here.

BurgerFi didn't need the SPAC IPO money to survive. But it did need the outsize cash haul to expand quickly. Over the next two years, the company expects to open up to 138 new locations. Between 60 and 70 of these will be company-owned -- that's significant since it only has 17 company-owned stores right now. In other words, its revenue growth and brand recognition is about to explode.

BurgerFi stock trades at roughly three times 2022 sales. For perspective, that's cheaper than competitor Shake Shack.

Closing thought

Investing in restaurant SPACs alone won't make you rich anytime soon. I think a couple are promising, like BurgerFi and USHG, but your investment portfolio should be diversified far beyond this space. That said, the stocks and strategies discussed here are food for thought (pun intended) on where to find some good value investments for your portfolio in today's hot market.