Be Wary of Lordstown Motors’ Awkward Dancing Partner

Just when you thought that this contentious election nightmare was over, the Wall Street Journal recently reported that Georgia will recount its ballots by hand. Presumably, this gives President Trump a chance to make his case for voter fraud. However, he will need to win other states so this effort may not be enough. If so, investors of Lordstown Motors (NASDAQ:RIDE) may be able to breathe a sigh of relief.

Image of a map showing Lordstown's location.
Source: SevenMaps/ShitterStock.com

In terms of policy, one of the distinguishing factors between the incumbent and challenger Joe Biden was environmentalism. During the raucous debates, President Trump challenged Biden on his stance on fracking.

Unfortunately, the former Vice President gave a contradictory answer relative to prior statements, which put his campaign team briefly on the defensive. Assuming that we don’t have a bizarre event take place, Biden will become our next President, setting in motion pro-green initiatives.

Essentially, we have a no-harm, no-foul situation. And that augurs well for Lordstown Motors thanks to its underlying electric vehicle business. Specifically, Lordstown will produce all-electric commercial pickup trucks incorporating in-wheel hub motors. Rather than power coming from an oversized electric motor, the company’s flagship Endurance will have power distributed across all four wheels. According to Lordstown, this design reduces moving parts and also frees up more space, a critical asset for fleet vehicles.

So, it should be all clear for RIDE then? Well, maybe not so fast. According to BusinessJournalDaily.com, a company called DTE Lordstown LLC filed a lawsuit against Lordstown Motors, alleging a breach of a utility services contract. Specifically, the electric truck manufacturer contacted DTE to manage Lordstown Motor’s facility’s wastewater treatment plant and utilities complex.

DTE is pursuing $2.5 million in damages. While I don’t want to dive into who’s right and who’s wrong in litigation cases, it’s interesting that yet again, we have an EV maker that’s courting controversy.

RIDE Stock Risks Being Taken on a Ride

Of course, when you’re talking about EV controversies, nothing is as electric as Nikola (NASDAQ:NKLA). A speculative bet toward an alternative to Tesla (NASDAQ:TSLA), so far, the available evidence points to NKLA being nothing but a clever sham. That’s too bad if that’s really the case because Nikola’s Badger pickup truck is something that has true conversion potential.

Obviously, since the scope of Nikola’s controversy is far greater than the lawsuit against Lordstown Motors, it’s easy to ignore any residual risk to RIDE. However, prospective buyers may want to look a little closer at the details.

As you know, among the most interesting components of the EV demand surge has been its seeming irrationality. I like the description that InvestorPlace contributor Thomas Niel used, that this is EV mania. Basically, we’re in a market where people are buying the rumor and buying more on the news.

And that made me think: Is there a way to determine if RIDE shares have also succumbed to EV mania?

To answer this question, I stacked up RIDE against NKLA at roughly the point when both securities began their initial moonshot trajectory. For RIDE, I charted data beginning on July 30; whereas for NKLA, I charted data from April 28. The results were startling.

RIDE stock vs. NKLA stock correlation
Click to Enlarge
Source: Chart by Josh Enomoto

Really, the math doesn’t lie. When performing the exercise above, the two price action trends share an 89% correlation coefficient. Frankly, the two stocks have the same chart; only the time frame of their individual price action was different. And that really should be a warning for investors to watch RIDE like a hawk.

Primarily, this is because Nikola has a longer price action history than Lordstown Motor. Further, if the correlation were to hold — of course, this is no guarantee but rather, a thought experiment — that would mean RIDE is only weeks away from incurring severe volatility.

You don’t want to draw conclusions from a disgraced company. But that’s also why this lawsuit against Lordstown may be more significant than most investors realize.

Troubled Days Ahead?

Frankly, it’s disturbing that RIDE and NKLA have printed almost identical charts. I mean, the former is associated with a company that has over 40,000 pre-orders. To Niel’s point, Lordstown also has the capacity to scale up.

So, why is it that from day one to day 73, the market is reacting almost identically to both RIDE and NKLA? I’m not saying anything about this lawsuit. But perhaps this may indicate a lack of proper governance at Lordstown Motors. And let’s be real — that wouldn’t be entirely out of the question given the lack of transparency we’ve seen in this and other sectors.

Further, I’d like to point out that Lordstown Motors is operating on two critical variables: first, getting a commercial electric truck out to market successfully and second, its in-hub motor technology, which could face some issues due to unsprung weight. There’s a reason why automakers don’t frequently deploy this methodology.

This is not to say that I’m outright bearish on RIDE. Rather, investors need to be careful and monitor the situation. If Lordstown Motors is truly different from Nikola, then it must break away from its correlating relationship with NKLA. Otherwise, the longer the correlation holds, the more you should be concerned.

On the date of publication, Josh Enomoto held a long position in NKLA.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/ride-stock-awkward-dancing-partner-cseo/.

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