Workhorse Group (NASDAQ:WKHS) stock has seriously benefited from recent SPAC investments. Let me explain.
The term SPAC is an acronym for Special Purpose Acquisition Company and they’ve become all the rage. A number of these investment companies are buying into the electric vehicle or EV space.
Workhorse and Nikola (NASDAQ:NKLA) are two stocks benefiting from this trend. They are EV newcomers, and more of them, such as Lordstown Motors, are joining the fray. Lordstown’s company spokesperson appeared very confident on CNBC Monday. The EV sector in general is quite frothy, so trading WKHS stock is a bit of a challenge.
The electric car industry is still in its infancy, so these companies won’t be accountable to stringent income and profit metrics yet.
Case in point, Nikola reported quarterly earnings last night, yet the focus was on the conference call. Investors were not so much interested in the results but rather what milestones to aim for next.
Workhorse operates in automotive and aviation so it could have a slight advantage there. Nevertheless, the overall thesis for EVs and WKHS is bullish for now. They are mounting a serious challenge against internal combustion engines (ICE), so they definitely have ample room to grow.
WKHS Stock Wild Ride
WKHS stock has already benefited tremendously, as it spiked more than 700% in June. Chasing huge rallies like this is rarely a good idea, but in this case the concept has a longer runway than usual. The EV market is still young and Tesla (NASDAQ:TSLA) already plowed the road for these followers to ride through.
Workhorse is now in a fierce race to come to market with EV cars and pickups, but a race where there can be many winners. If indeed electric vehicles are the future of transportation, then there will be enough room for all of these to thrive.
Buying and holding the stock now for the long-term is definitely viable. Ideally investors would want to buy the dips rather than chase the rips; Workhorse stock recently corrected 40% before it found footing.
The good news for bulls is that it also managed to stabilize before remount an equally-large rally. So far it has failed to set a new high but as long as the bulls can hold above $15.7, then their odds of recapturing the highs are good.
There’s no sense judging this stock from the traditional metrics because there aren’t any. On their next earnings report investors will need management to be confident that they are executing on plans.
Moreover they should also lay out clear milestone events dates. Wall Street hates uncertainty and the more information they have the stronger their conviction becomes. Opacity breeds fear and will cause traders to shy away from WKHS stock.
The Trading Road Map is Set
In the absence of fundamentals, lines on the chart offer great insight. During the July correction, the stock found footing just under $14 per share. I expect that zone to hold, but if it fails, the next pivot area is $4 lower.
In the middle of June, the bulls and bears fought it out hard between $8 and $10 per share. This makes it the most significant consolidation support zone should management completely disappoint investors this week.
Extremes are usually wrong, and in this case the June rally was too strong too fast near $22 per share. Conversely, expecting a complete collapse so soon is also wrong, so the truth lies somewhere in the middle.
The reasonable trading plan for the WKHS stock would be to chase to breakout above $19.7, or buy the dip near $13 per share. A move away from either of these two lines will carry momentum in that direction.
Investing in 2020 has been trickier than most other years in history. The macroeconomic conditions are terrible yet there is very little fear manifesting on Wall Street. Traders are nervous and evidence of this is that the VIX is twice as high as its average.
Yet these nervous markets are buying frothy stocks first, suggesting there is no real fear. Otherwise they would favor more certain businesses instead of these unproven concepts.
It is hard to short companies like Workhorse that in theory could be the next Tesla. Investors need to find the balance between optimism and irrational exuberance.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.