The electric vehicle (EV) story hijacked the imagination of investors on Wall Street this year. Tesla (NASDAQ:TSLA) kicked the door down and a slew of new entrants are rushing though. A lot of them took a shortcut through the IPO process via special acquisition corporations (SPACs). Workhorse (NASDAQ:WKHS) is an e-truck company hoping to become a leading EV maker for the future. Meanwhile, the WKHS stock has been as wild as a bucking bronco for its investors.
This fast moving stock has had four stints bigger than 30% this year. The last came with a 35% drop since after its November peak. Thanks to clues in the charts I am two-for-two writing about this stock. In October, I correctly noted an upside opportunity and it played out well. Earlier, in September, I raised caution and that marked a top at the time. Both were spot-on strategies.
Today, the idea is to rinse and repeat.
WKHS Stock Is Inside a Predictable Range
But first we should spend a few minutes revisiting the fundamentals from three angles. First, it is important to note that the global macroeconomic conditions have worsened. The novel coronavirus is in its second phase of infections and states are reverting to lock downs. Last week, Pfizer (NYSE:PFE) finally received the Food and Drug Administration’s blessing to deploy its vaccine for Covid-19. There are a slew of other providers on their heels. This will help ease some of the pressure on governments trying to control this pandemic. The scientists are here to the rescue.
Second, the EV craze is starting to get tired. It seems like everyone is on board as if it has won the battle against ICE. In reality the work there has just begun. The electric vehicle has gone further than ever before mostly thanks the Tesla. But the hard work from here brings a new challenger to the new entrants: The collective of giant ICE auto makers. Currently, the world produces more than 80 million fossil fuel vehicles. If indeed electric is the way to go, the current giants will switch to fill that need. Much like they’ve done before when trends take big turns.
Third, is the economies of scale. It will be hard for small manufacturers like Workhorse to step up. Tesla is doing it, but there is only one Elon Musk. With all due respect to the other leaders, most won’t make it to the big leagues. If you believe in the Workhorse team, then by all means own that stock for the very long term. Those who did it with Tesla got a big payout. The current fundamentals are bad, but that’s always the case with startups, so don’t let that stop you. They are definitely not a reason to discount the opportunity. It’s all based on faith at this pre-revenue stage.
Trade It in the Meantime
The other way to do it is to use WKHS stock as the great trading vehicle that it is. For the last six months it has been trading inside a really wide range. The idea is to buy it near $20 per share and fade above $28. I personally avoid shorting stocks, so my strategy would be to try it long here with a tight stop below. I would hold it for two weeks to see how it deals with $23 per share. If the bulls can break through it, then the rally is on for another $4 or so. Otherwise, I’d buy the dip at $20 one more time.
I mentioned in my last write up the opportunity of selling puts or put spreads in WKHS stock. That too worked out well for those who tried it. Using options like that means that investors can leave some room for error. This works best for those who want to buy the shares now, but wished they would have bought them lower. For example, instead of buying shares at face value, I can sell Jan $19 puts and collect almost $2 for that. WKHS stock can fall 12% and I can still retain maximum gains. I break even closer to $17 per share. These are uncertain times and any buffer from current risk is a smart idea. The important bit for strategies like this is that the investor is willing and able to buy the shares.
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.
