So far this month, Workhorse (NASDAQ:WKHS) has reversed some of the decline its shares saw in October. Shares have bounced back more than 30% since election day (Nov. 3). But, while a Biden presidency bodes well for electric vehicle (EV) stocks, for this EV play there’s a more important near-term factor at play.
I’m talking about the company’s prospects of fully (or partially) winning the $6 billion vehicle contract with the U.S. Postal Service (USPS). The lion’s share of the company’s valuation is based on investors expecting this upstart to beat out the more established rival bidders.
Given its the only all-electric contender, I agree there’s some merit to this thesis. But, what are its true odds? Given the company’s prior “critical failure” problem, along with more recent issues, this company still seems like an underdog.
That being said, the optics of “going green” may prevail, and the USPS may give it at least part of the lucrative contract. But, even if it fails to get even a piece of this deal, there’s another catalyst still in motion.
That would be its 10% stake Lordstown Motors (NASDAQ:RIDE). This investment could help soften the blow if it loses out on the USPS contract.
In short, while this remains a very speculative EV play, consider it a cautious buy, as shares could continue to rise in the coming weeks.
Why Optics Could Prevail for WKHS Stock
First, it’s tough to handicap Workhorse’s true odds with regards to the Post Office contract. On one hand, despite its relative lack of experience, the U.S. government may want to give Workhorse a piece of action, to demonstrate it’s serious about “going green.” With this in mind, the company has rival contenders Ford (NYSE:F)/Oshkosh (NYSE:OSK) and Karsan/Morgan Olsen (neither of which is fully electric) handily beat.
On the other hand, Workhorse isn’t exactly “ready for prime time.” Sure, the company may have gotten over the various “critical failures” detailed in short-seller Fuzzy Panda Research’s scathing October “short report.”
Yet, some of the company’s “growing pains” have been recent. As our own Louis Navellier discussed Nov. 16, the company has had multiple supply and production issues so far this year. This includes the novel coronavirus pandemic that impacted more than one-third of its production team. As a result, the company produced just seven vehicles in the prior quarter. Does this sound like a company on the cusp of winning a multi-billion dollar contract?
However, given how wacky 2020’s been, I wouldn’t rule out a partial Workhorse victory. Despite its many apparent flaws, optics may prevail, and the company could get (at least a piece of) the contract. What does that mean for shares if it wins? Given the “buy the rumor, buy more on the news” mentality of today’s stock market, shares would likely head back to prior highs (above $30 per share), and beyond.
But, what if it doesn’t win the contract? Shares would obviously head lower on the news. But, factoring in its 10% stake in Lordstown, downside risk may be less than it seems at first glance.
Lordstown’s Rebound Could Minimize Downside Risk
With the USPS contract decision still pending, Workhorse remains a high-risk, but high potential return, situation. However, while shares could take a big hit it the company fails to win even a piece of the Post Office deal, the company’s investment in Lordstown Motors may help soften the blow.
How so? With RIDE stock soaring thanks to the “Biden Boost” in EV stocks, Workhorse’s stake is now worth $400 million. Compared to this company’s current market capitalization ($2.6 billion), that’s nothing to sneeze at.
But, that’s not all. Consider what happens if this stake retains its current value, or even heads higher. The value of this investment could minimize the downside if Workhorse fails to win even a piece of the USPS contract.
Of course, a continued rise in Lordstown’s share price is far from guaranteed. If the “EV Bubble” starts to pop, and RIDE shares fall back to prior prices, this quasi-“margin of safety” will fly out the window as well. This factor doesn’t make Workhorse bulletproof. But, it’s better than nothing.
The Bottom Line on Workhorse
I continue to be skeptical whether there’s steak to go with the sizzle surrounding this stock. But, while there’s plenty of evidence why this upstart has little chance of winning the USPS, optics may prevail for the only all-electric contender for the contract.
And, if optics don’t win out? The company’s stake in Lordstown may minimize how far shares fall from here. So, what’s the play, as Workhorse trades around $22 per share? Tread carefully, but there’s still room for shares to head higher in the near-term.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.