In under a month Workhorse Group (NASDAQ:WKHS) rallied and fell more than 30% twice. How do you invest in a stock this wild? You trade around the short-term price action. WKHS stock is definitely wild but somewhat predictable. It moves fast in both directions but respects the important levels on the charts.
It rallied 90% in September into an all-time high, then gave almost of all of it back. It repeated the process again in days, so clearly it’s not for the faint of heart.
The problem is in its thesis. Workhorse is part of a group of stocks that burst onto the scene this year through the SPAC processes. The electric vehicle (EV) market caught fire after seeing the success of Tesla (NASDAQ:TSLA). The fundamental changes were so obvious to see that investors wanted back in. Just this week we saw that General Motors (NYSE:GM) brought back the Hummer in an EV “super-truck” format.
These new entrants all aim to be the next Tesla. Workhorse is one expecting to do this with electrified trucks. In essence, this is a concept in production not out in the market yet. When there’s nothing tangible then the traders are free to move the price violently.
The best thing to do with stocks like this is to trade them based on the charts. They say that “price is truth.” And when there’s the absence of fundamentals, then that’s even more to the point. The charts are the only reliable thing to give traders an edge.
WKHS Stock Chart Is a Valuable Resource
In the middle of September I cautioned against chasing WKHS stock into the spike. It was a successful strategy. Although I didn’t catch the absolute top, I did avoid the grief from riding it all the way back down to $20 per share.
My message has been consistent that this is a stock that delivers profits if we wait for dips. Momentum traders like to buy high and sell higher, but unless you’re glued to your computer, leave that to the full time pros. Retail investors should aim to find entry points that make sense. Near $20, WKHS stock should have support.
This is not a hard line in the sand but a reasonable zone. It has served as a neckline since July. The stock failed there twice and then finally broke out in September. The bears have tested it twice already and from lower highs. Now the overall trading range has tightened into a point at this pivot zone. Normally these are places to buy for a swing trade up. There will be resistance on the way up starting at $24 and $26 per share.
The alternative way to trade it is using options. Investors can sell bull put spreads and leave plenty of room for error. The advantage of this method is that it eliminates the need for a rally to profit. The disadvantage is that the maximum profits are capped.
Catching a long rally while holding shares is very profitable. But there’s nothing wrong with profiting with no money out of pocket even if the shares fall 20%.
Valuation Metrics Are for a Later Date
The fundamentals on Workhorse do not have actionable statistics yet. The traditional metrics are wonky because it is a startup. This is not a knock against it, but it does make the thesis very speculative. Those by nature need to have very humble conviction. This is the kind of trade that I place tight stops to get me out with minimal damage. This is definitely not an investment where I average down in case the price goes against me.
Workhorse has the potential for success. Case in point: Nio (NYSE:NIO). As with all stocks, WKHS will need the help of the macroeconomic conditions. There are outside risks from politicians who are busy making things difficult with the campaign and the stimulus headlines. Moreover, it looks like there are more outbreaks of Covid-19 going into the cold months. Momentum stocks like WKHS stock are susceptible to fast draw-downs if markets trip.
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.