Monday was a terrible day on Wall Street. The S&P 500 fell 8% at one point and small-cap stocks were down 10%. Nio (NYSE:NIO) stock lost 7% — which certainly sounds bad — but rival Tesla (NASDAQ:TSLA) lost twice that.
Equity investors went into the weekend knowing that stocks were vulnerable as the coronavirus from China left its impact on the world. The extra punch came when Saudi Arabia decided to wage an oil price war.
At the end of last week, Russia rejected an OPEC proposal that would have extended oil production cuts. Such a move would have helped stabilize prices as the coronavirus continues to hamper business. But when Russia walked away, Saudi Arabia responded by slashing prices on its crude oil and flooding the market with supply. The country is now playing a game of Russian roulette with the price of oil.
What was the result? A 25% collapse in the black gold overnight. This opened a trapdoor under equity markets that triggered a 15-minute trading halt.
Wall Street has been bullish for a long time, so it’s hard to not expect a V-shaped recovery on dips. But this correction could be different — only time will tell. The panic over the coronavirus is having a real impact on global business. Companies will have to revise their 2020 expectations. And unsurprisingly, this will all hurt stock prices.
Nio’s Value and Nio’s Growth
So how does this impact Nio? This weekend’s news has a direct impact on electric vehicles. A long-term collapse in oil prices — meaning cheaper gas at the pump — weakens the argument for EVs.
But if experts are correct and combustion engines (powered by fossil fuels) are on their way out, the long-term trend should survive. An overnight drop in oil prices shouldn’t change this thesis. With this in mind, Nio stock will eventually be a winner, even though it is a young member of the EV industry.
Tesla remains the EV champion.
While Nio looks expensive from a traditional price-earnings perspective, it’s not fair to stop there. It’s a growth stock so it’s not meant to be cheap. Moreover, it trades at a price-sales ratio near 4.2. This suggests that Nio is not bloated.
Comparatively, Tesla sells at 5 times its sales, so Nio looks even more like a bargain.
The Light at the End of the Tunnel
The long-term success of the company depends on how well its management continues to execute on plans. After approaching $1 in October 2019, Nio stock is trying to climb higher. Unfortunately it hit a band of resistance near $5, and it now trades below $3.50.
I wrote about its upside potential early in February and the rally delivered more than 30% in just a few days. Now Nio must survive the stock market’s correction and battle its $5 resistance again.
Investors who want to go long here need to believe it is capable of those things. It stands little chance of rallying if the whole market keeps collapsing. The broader market’s dip from all-time highs shouldn’t scare investors, yet. But Wall Street’s flip-flopping sentiment and the craziness on Main Street are both valid sources of concern.
People are freaked out and acting irrationally. Hoarding toilet paper is a strange way to combat a virus. Acknowledging human behavior, I humbly accept that there are just simply other things at play here. Caution is warranted regardless of how confident you are in Nio’s long-term thesis.
How to Trade Nio Stock
Want to enter a position in Nio now? Do so in small increments. It’s important to leave room to manage risk in case the panic lingers.
World leaders have bungled this outbreak, leaving its effects up to our imaginations. These leaders — typically voices of reason — should be easing minds that the problem is in capable, well-funded hands. But that isn’t happening.
Governments should also provide interest-free funding to businesses that need it during this tough period. Last night, President Donald Trump hinted that a payroll tax cut may be around the corner. This is a good start, but we need more.
Until such relief comes, people will continue to imagine the worst-case scenario.
What Does the VIX Mean for Nio?
Statistically, we should see a bounce in equities after a giant down day. But for now, every spike should remain suspect and investors should refrain from chasing a rebound with full force. Overall, I believe that this will pass, but I want to see more confidence first.
When the CBOE Volatility Index (VIX) remains over 50, I always expect the unexpected. However, I also always expect that premiums in the options market — especially puts — will be explosive. This benefits the strategy of selling puts to get long.
But this is only true if someone actually wants to own Nio shares. I do not sell puts below with uncertainty. This sounds complicated but it is rather easy.
Instead of risking $3,000 to buy 1,000 shares of Nio stock today, I can collect $1,000 to maybe own them at $2.50. I would then only own the shares if the share price falls below that strike point. Otherwise, the $1,000 is mine to keep and I don’t even need a true rally in Nio to profit.
Here’s a final note on this strategy. Selling puts without the intention of owning the shares is extremely risk, especially with a VIX above 50.