It’s Definitely Time to Take Profits on Nio

Not to toot my own horn, but in early June I recommended that traders shouldn’t wait too long to take a position in Nio (NYSE:NIO). If you took my advice, then you’re probably doing well in your Nio stock position as the shares have appreciated in value considerably.

Nio Stock May Actually Be Worth the Gamble This Time
Source: xiaorui /

This leaves us with a couple of questions at this juncture. First, would it make sense for investors to start accumulating the shares now? And, should current Nio stockholders maintain their positions in anticipation of further gains?

In this rather unusual market environment, stock traders have been conditioned to buy stocks after a massive price run-up. They’ve been rewarded time and again as vertical price moves are the norm nowadays. Yet, is this a reasonable basis for owning Nio shares now?

The popular sentiment would say yes. But just as I expressed an unpopular view in recommending Nio stock when the price was depressed, I’m going to continue to contravene the norm by advising caution amid a hype-fueled rally.

A Closer Look at Nio Stock

Fundamentals will always matter, but the main focus in this analysis will be the re cent price action in Nio stock. Perhaps this exploration of Nio will convey a concept that can be applied to other stocks, as well.

It might be tempting to view the price action in Nio stock as a rocket ship going into outer space. That type of imagery is appealing because it implies limitless upside. Plus, we can conveniently ignore that rocket ships are generally brought back down to earth at some point.

As an alternative to the rocket-ship analogy, I invite you to try a completely different analogy. Think of a stock as a rubber band, which can only stretch so far. Nio stock has exhibited rubber-band-like qualities as it snapped back hard after $11.60 in 2018 and $10.16 in 2019.

In a matter of three months, from early April to early July, Nio shares were stretched from $2.39 to $9.38. That includes an 18.38% single-session move on July 2. If history is a reliable guide, then a snapback in the $10’s or $11’s is due.

In other words, the rubber band has been stretched almost to the max and the snapback could be brutal. If there’s a science to profit taking, then we can use Nio as an object lesson in knowing when to take the money and run.

Accounting for the Electric-Vehicle Hype

Just based on the price action alone, buying or holding Nio shares at this point would be a dangerous proposition. The risk-to-reward profile just isn’t favorable here.

That’s not to imply that Nio isn’t a good company. Still, the fact that Nio’s trailing 12-month earnings per share amounts to $-44.10 is bothersome. It’s hard to justify such deeply negative earnings with a stock that trades under $15.

And while Nio’s positive second-quarter earnings surprise may account for some of the share-price rally, the severe melt-up began in early April. It’s probably not happenstance that Nio stock’s parabolic move coincided with similarly vertical moves in Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA) shares.

In the broader electric-vehicle market, it appears that hope has unfortunately morphed into hype. Traders, many of whom probably have scant experience, have been gobbling up electric-vehicle stocks lately.

Thus, we might consider the possibility that enthusiasm, coupled with an overreaction to a good earnings result, has stretched the rubber band a little too far.

The Bottom Line

If you gained tens or hundreds of percentage points in your account through a position in Nio stock, congratulations certainly are in order. But don’t expect that rocket ship to fly much farther as stretched stocks can snap back surprisingly hard.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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