When it comes to trading, I prefer not to chase the herd. It’s not that I am a contrarian because I don’t mind having similar opinions to consensus. I worry about getting in too late or staying too long in trades. This often leaves me sounding like a bear on Nio (NYSE:NIO) but that’s not my thesis. The electric vehicle has a real chance to uproot the internal combustion engine (ICE) from its perch. If so then NIO stock is a winner long term.
This is one of the few EV companies that is actually off the ground floor already. Hundreds are trying but only a handful have current P&L’s to show for it. The rest are business ideas or half-finished prototypes. Heck, some even rushed to display fake ones like Nikola (NASDAQ:NKLA), to pick on one.
A perfect example is how Workhorse (NASDAQ:WKHS) stock fell 50% yesterday and more this morning. Very few will make it to the big leagues Like Tesla (NASDAQ:TSLA)) and Nio. The EV sub-industries like batteries and recharging concepts are also abuzz with potential.
If the markets are higher in the future then my bet is that Nio stock will also be winning. In January, I cautioned against chasing it blindly. But I also suggested to wait for a dip to get in. My exact words were “there is proven support anywhere above $42 per share. If for whatever reason the stock falls close to that I’d pounce.” That is exactly what happened.
Yesterday the opportunity presented itself as the markets stumbled hard. Nio’s low was $41.66 pennies away from my $42 mark. The market spoke loud and clear because they immediately bought it. Within minutes it recovered to $47 per share, which is proof of the value. Savvy investors immediately capitalized on the opportunity.
Nio Stock Has a Strong Base This Year
The trading methods may differ but the levels that make sense are universal. I have great confidence in saying that NIO stock has a strong base at or above $40 per share. Since it still has to trade inside the whole market, it could see some selling pressures form that. But the flash Tuesday low would still make sense.
For those who missed the perfect entry they can still get it through options. There I can deploy trades that would either give me shares at $35 or create me income from thin air. To do this, I sell the April $35 put and collect $220 in net credits per contract.
Yes, money goes into my account to open the trade. I never do this if I am not looking to own the shares. If disaster strikes and NIO crashes to say $33 I would still be in great shape. Because my goal is to take the shares if they assign them to me. My breakeven point on that would be slightly below $33. Compare this to someone who bought shares at $47, they’d be already down 30%.
The fundamentals are easy to judge. Yes, Nio loses money, but at least they are growing sales quickly. Plus they will have help from the state if they need it. I also like their battery program. It mimics the ICE logic where they treat it like fuel. The price-to-sales is in line with that of Tesla, so there is no extra froth. I am by no means saying it is cheap, but that’s not a metric I need now. Growing fast cannot happen without loose purse-strings.
Beware of the Blindside
I do attribute a lot of risk to extrinsic factors. The stock markets are acting irrationally so I fear a crash is coming. I don’t short the indices while I wait for it because it’s not clearly imminent. But I do hedge my positions just in case it comes. The VIX hasn’t traded within 25% of its mathematical average in a year. That’s not normal so eventually this party has to end. The house of cards that the small-caps are building, for example, includes too much froth.
The underlying assumption can disappear and so will the bids. Think back to 2008, I bet that you didn’t see it coming. Back then the assumption that home values were fact. In reality, they were mostly made up figures to push loans through.
Moreover, think back even further to the dot-com bubble. This situation here now has become very similar to 2000. It wasn’t like this six months ago but now it is. All this is to merely bring some doubt, not panic. Just so to keep me grounded in the size of risk I deploy.
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.
