Fake it until you make is the thesis behind today’s write up of Nikola (NASDAQ:NKLA) stock. If you are a fan of the stock don’t take offense to it because I am on your side. I don’t claim to be an expert on it since nobody really knows.
It seems that even industry experts like General Motors (NYSE:GM), who actually did their due diligence, now have doubt. Therefore today I form my opinion on NKLA stock with the caveat that this is a speculative bet.
On the one hand the company has attracted billions of dollars so one would think they are legit. On the other hand there are stories about the dummy truck rolling under gravity power, not its own. I am somewhere in the middle.
Where there is smoke there is fire so I am sure not everything is as it seems at Nikola. But I also think that they have the opportunity to make something happen.
My initial reaction to seeing an interview with the company ex-Chairman Trevor Milton on CNBC was negative. My takeaway was that he was more proud of his stock than the company. Then I came around after hearing about the high profile deals they lined up.
It’s been a roller coaster ride trading NKLA stock but a lot of investors are in pain. The stock rallied 500% going into the summer so they had plenty of time to book it. Those who didn’t take any profits should probably admit that they never will. It is a bad idea to ride a stock up 500% and not lock some green.
Today I will share my agnostic opinion on the stock and identify the opportunities ahead. It is now 80% below the highs so most of the froth is out. What’s left is the base.
NKLA Stock Is 80% Off the Highs So the Froth Is Out
But first let’s frame the market in general, which has never been stronger. This is strange since the economic conditions have never been worse. The virus is ramping up again with record infections and the FDA is dragging its feet approving the Pfizer (NYSE:PFE) vaccine for use domestically. Foreign nations got it before us and that’s a shameful story all by itself. Somehow, investor confidence has never been stronger and they are buying the frothiest of the companies.
Two unicorn IPOs came to market this week and the appetite for them was voracious. Both Airbnb (NASDAQ:ABNB) and DoorDash (NYSE:DASH) had no shortage of buyers.
Another example is Snowflake (NYSE:SNOW), which rallied almost 50% in three days to start December. Its stock price now has over 200 years worth of yearly sales baked into it. Needless to say that there is plenty of appetite for risk, and therein lies the opportunity for NKLA stock.
When in doubt, use the K.I.S.S method. Also known as “Keep It Simple, Stupid.” Nikola stock saw incredible spikes and crashes for the last seven months. But it kept one thing constant and that’s the base for all the action. The bulls have so far defended the zone above $16 like their lives depend on it. The scenario that could unfold once that line is lost spells big trouble for NKLA stock.
Important Assumptions About Its Support Zones
Today my assumption is that the support is concrete and it will hold into the first quarter of 2021. Buying shares here makes for an excellent lottery ticket. I say this to remind us of the nature of this bet. It’s not an investment where I can risk huge sums like I would for a dip in Tesla (NASDAQ:TSLA). It is a speculative bet and I should be willing to lose the whole lot.
The strategy is simple: buy it now and hold it until middle of next year at least. I would scalp out for quick profits on headline spikes.
Alternatively, I could use options and make this risk much smaller. Instead of buying shares I could buy calls for late next year for less money. Each contract allows me to control 100 shares so my out of pocket expense would be much smaller. Those verse in trading options could then also sell covered calls against their stock or calls.
Notice that I have not once mentioned fundamentals, and there are none. For all intents and purposes Nikola is still a pre-revenue company. From here it’s all about the headlines. That is another reminder why I classified Nikola stock as speculative bet.
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.
