I like the enthusiasm and I like the story of the electric vehicle mounting an assault against internal combustion engines. ICE cars are still the norm but thanks to Tesla (NASDAQ:TSLA), the battle is on. Nio (NYSE:NIO) is a smaller soldier in it and it’s doing its part. TSLA has the early mover advantage and the stock is up 400% year-to-date. But thanks to a recent push, Nio stock is now up over 838% this year.
It was up another 6.2% on Wednesday, and therein lies the reason for my cautionary message today. I promise you that I was bullish on it from under $3 per share in March. And that was after another earlier bullish note and before the pandemic broke out.
Investors that are not already on board of this ride should wait out this burst. This is a good example of the fear of missing out or FOMO. Coming in this late leaves a lot of room for disappointment. Notice that I didn’t dis the company or its progress. I am not holding out from new entries here for fundamental reasons. This late in the rally, I would rather miss out on the upside and admit I missed it. There will always be another day or another ticker to trade.
Nio Stock Has Momentum on Its Side
The electric car has been around since 1880 but this is the only time it has a chance at success. The EV push is definitely gaining strength, the difference is tangible, even since last year. There are only a few providers of EVs and a slew of others coming online. This means that the potential upside for Nio is huge. Having competition is not a problem, in fact, it is an asset. The more of them there are the more mainstream EVs will become.
Regardless, Nio stock has doubled since Labor Day. Oct. 27 marked a bottom and it gained 45% in six days. You get the message — this would be the picture perfect example of chasing. However, I would not fault investors who want to own it for the very long term. There is no reason for it to disappoint by then. In the short term, there could be setbacks, and if so, they could be big. Otherwise they can hold it for the long-term home run.
From a trading perspective, I should wait because I am confident I would get a better entry point. Momentum traders better be fast, they also need to know how to set proper stops. Those who are not nimble enough should admit that they missed it and wait for the pullbacks.
Patience Is a Virtue
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Buying fast stocks when they fall back to breakout lines makes better sense. Nio stock has one breakout at $29 per share and another at $22. Any dip into either of those two would be an opportunity to catch on bad days. I find it dangerous to fall in love with the stocks we trade. Then we tend to look through skewed lenses and make up excuses if things sour. If it upsets you that I suggest Nio could see a temporary pullback, then you could be too emotionally invested.
In March, I advised to buy NIO stock under $3 per share. That yielded over 1,400% in gains, so I am definitely not a perma-bear rooting against it. My concern is with finding entry points that have the least likelihood of disappointments. Avoiding obvious mistakes is essential.
Buying a rally after this much upside in a blink leaves us open to risk. In addition to the steep stock ramp, there are significant external factors that could derail all equities. Nio stock won’t rally alone regardless of how good the story is. If the markets falter, it will too.
EVs Are on the Charge But It’s Not a Free-for-all
This year has been the year of the SPAC and specifically for EV companies. Tesla made the dream a reality and drew the blueprints. The rest are walking through the door that Elon Musk opened for them. At least Nio has sales already while others, like Nikola (NASDAQ:NKLA) and Workhorse Group (NASDAQ:WKHS), are pure speculation on the future. Not every SPAC to spawn an EV will be the next Tesla, but Nio is probably in the lead of the bunch. Commit to it for the very long term or buy the dip into weakness.
At this point, the Nio stock fundamentals are no longer an asset. When I wrote my last article, the price-to-sales multiple was 4x. Now it has ballooned to 30x, or twice Tesla’s. Too much hope is already in the stock price now. It does have the growth but so does Tesla. Between the two I’d rather own Tesla.
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.
