SPAC investments are all the rage this year and the current trend is for them to bring Electric Vehicle (EV) companies to market. Workhorse Group (NASDAQ:WKHS) is one of those companies. Needless to say that WKHS stock has rewarded the bulls handsomely up 733% in 2020. Just yesterday it rallied 5%. The impressive part is that it didn’t correct with the general markets last week. The owners of this stock seem to have long term conviction in its success, so it is hard to short so soon in its process.
While the bullish thesis finally has legs, for half a century EVs have been unsuccessfully trying to unseat the internal combustion engine (ICE). Thanks to Tesla (NASDAQ:TSLA) this battle is now more legit than ever. New contributors also include smaller companies like Nio (NYSE:NIO). This is still a hot topic judging by the hoopla that Nikola (NASDAQ:NKLA) caused over the last two weeks. The short story is that these are intrepid companies trying to topple the ICE giant. It won’t be easy and not all of them will be winners. For now it’s hard to discount any of them so early in the process.
WKHS stock is acting like investors know it will indeed be part of the prevailing team. There is a lot of room to run before the bears can prove them wrong, so shorting it can be painful and dangerous. However, I caution against blindly chasing the upside because it is technically over-extended.
Momentum traders are fine buying high and selling higher, but doing this for an investment is open to disappointments. I am not a hater. In fact, I last wrote a bullish article on WKHS stock in early August. It delivered a 50% since then, so I have a clear conscience when I merely warn readers to be careful at these levels. At the very least new investors should start with only a partial size bet now and manage it over time.
WKHS Stock Valuation Is the Mother of All Hopium Bets
The electric alternative is still very far behind the incumbent. While fossil fuels are under assault it is still mathematically not viable to flip the global switch. EVs are still but a fraction of ICE machines but therein lies the upside potential. Just to stress the obvious point I am making: WKHS is a buy for the long term but better done on dips. At least refrain from chasing it on days where it is running wild.
Valuation will matter at some point and now is not the time that investors are choosing. If they did, they would pass out from knowing that its price-to-sales is over 4,000x. That would mean that the buyers of the stock are fronting the company 4,000 years worth of their total yearly sales now. It sounds wonky because for all intents and purposes they are still pre-revenues.
This is the evidence that any investment in Workhorse is 100% speculative and size of the risk matters. This is not a stock investors should average down on. It either wins or not and coin flip odds are for gamblers, not investors.
The Twist in Trading EV Stocks
Investors in Workhorse also need to heed what’s going on in Tesla stock. It being the first mover has a direct effect on the rest of the gang like WKHS and Nio. In fact, trading the smaller stocks like this makes for a cheap way to bet on the TSLA stock short term price action. Giant dips in Tesla would be a good time to get long NIO or WKHS for trades. Those can also turn into longer term investments. Be careful of how WKHS moves around Tesla’s Battery Day coming up soon.
Meanwhile enjoy the wild ride, as beautifully demonstrated on Monday by the action in Nikola stock. It fell to $27 then spiked to $37 in the matter of minutes as emotions ran high. That’s about a 15% morning crash then a 30% rally into the afternoon with no actual change in the fundamentals.
Let this serve as proof that these are speculative stocks and investors should expect the unexpected. This is also reason to keep realistic levels of conviction when trading them.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.