Why Workhorse is Vulnerable to a Steep Sell-off

Buying momentum reappeared for clean energy companies following over a month of its absence. Markets are betting that following the U.S. election results, the Democrats will support electric vehicle, battery storage, and clean fuel solutions. Bears are feeling the pinch with Workhorse Group (NASDAQ:WKHS). The short interest of 35% is squeezing the bearish bet against WKHS stock.

Image of a Workhorse (WKHS) logo and drone on the side of a truck.
Source: Photo from WorkHorse.com

Investors are awaiting news on the company announcing a big contract with the postal service. Conversely, bears are betting that a deal will not come. Who is right?

WKHS Stock Nears Highs

Workhorse flirted with the $30 level, not far from its Sept. peak of $30.99. Speculators scurried for battery storage stocks like Blink Charging (NASDAQ:BLNK) and Ayro (NASDAQ:AYRO), buying Workhorse stock in the process. Momentum may shift in either direction as volatility mounts. Investors cannot rely on fundamentals to justify the rise in any of those aforementioned stocks. Rational investors looking at its third-quarter results would avoid Workhorse.

The company posted revenue of $565,000. Although this is up sharply from a miniscule $4,000 in revenue last year, markets are forward-looking entities. CEO Duane Hughes said that its weak revenues are due only to a delay in its progress. He said, “We’ve introduced several new battery supplier options into our supply chain and will have supplemental volume additions in the first quarter of 2021.” He also hinted that the full impact from the Covid-19 pandemic is unpredictable.

Given the rising cases worldwide, the executive has a good excuse for missing expectations next quarter. Conversely, markets are betting that a vaccine will bring a return to normalcy in the business and to Workhorse’s suppliers.

Outlook

Workhorse set a production volume target of 1,800 vehicles for 2021. This is achievable because it received a purchase order for 500 C-1000 trucks from Pritchard Auto Company in Q3. It partnered with Hitachi and Hitachi Capital America to optimize its manufacturing, operational, and supply chain.

CEO Hughes is confident that one of its suppliers will address the slow ramp of battery packs. He said on the conference call that its current supplier has additional methods to meet Workhorse’s capacity needs. For example, it observed the success of those packs and its performance in Workhorse’s vehicles.

From a certification testing process and with its customers, the company is satisfied with the battery pack performance. To reduce its supply risks, it will have at least three or four suppliers.

Catalysts

Workhorse has a good relationship with UPS (NYSE:UPS). As its premier customer, it already delivered 345 vehicles to UPS previously. And because it understands UPS well and knows how it operates, Workhorse is determined to deliver a quality product from the onset.

The U.S. Postal Service deal is still a wild card. If it wins the contract, the deal would be worth $6 billion. At a market capitalization in the $3 billion range, Workhorse stock would be trading at a forward price-to-sales ratio of 0.5 times. Currently, the company has almost no revenue relative to its market cap. So, speculators are making a huge bet that a deal is on the way.

On Wall Street, only four analysts offer a one-year price target for Workhorse Group. The average price target, according to Tipranks, is $23.67.

By the numbers, Workhorse is not an attractive investment at this time. It has a low overall ratings score. Its growth rating of 69/100 is overshadowed by its momentum ratings score:

Ratings vs. Peers
Overall Ratings Score 32
Growth Ratings Score 69
Valuation Ratings Score 17
Efficiency Ratings Score 13
Financial Strength Ratings Score 6
Momentum Ratings Score 100

Chart courtesy of Stock Rover

The momentum score is solely a reflection of the stock’s recent strong climb. Sentiment may quickly reverse, sending the score lower. As expected, Workhorse has a low value because it is losing money. Its costs greatly exceed its revenue.

Workhorse is a good momentum trade. Should positive sentiment evaporate, sell the stock at any cost.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/why-wkhs-stock-is-vulnerable-to-a-steep-sell-off/.

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