The price action on Wall Street has been very erratic to say the least. Case in point, Wednesday the small caps rallied 2% while the rest of the markets were flattish. Strength came into the frothiest and the craziest stocks. The king of cray-cray is GameStop (NYSE:GME) and it rallied 15% to name one. Today we will focus on three such wild stocks to trade going into the summer.
Most of these tickers are sensitive subjects to investors. They evoke a lot of emotions, so the debates around them are often very fiery. I had a few squabbles on social media over even mild comments I made. It took me a better part of a day to deal with the trolls. There was very little substance coming through from the other side.
Most of these wild stocks have more in play than just fundamentals or technicals. The pandemic brought about a new breed of traders and they’re trying to carve their niche on Wall Street. They don’t necessarily follow the traditional investing rules and logic. I’m not passing judgment on them, but merely describing the situation. Time will be the best judge in the end, unless the SEC does its job first.
Meanwhile, there are opportunities to pursue even in these wild stocks. I am confident that many stock stars now may not exist in two years. The trick is to know which ones to invest and which to only trade. Of the the three today, I would only consider one worthy of fundamental risk. The other two, unless management changes the status quo, the trend is negative. This is not my opinion, it’s fact off their own P&Ls or lack-thereof.
The three tickers for today are:
Wild Stocks to Trade: AMC Entertainment (AMC)
I am not a fan of AMC’s current fundamentals – and for good reason. For almost a year, their main source of income died. It was illegal for people to gather in groups. Furthermore, there were hardly any new movies to show. The pandemic should have been the end of the company, but they survived and that’s impressive. What bothers me is that the stock now is much higher than before the pandemic started.
This makes no sense because the business proposition is still much worse than it was before. Yet investors have already priced in so much upside. In fact just yesterday, AMC stock soared 20% in mere hours. Those who are trading the action need to know how to read charts. Otherwise there are likely to repeat mistakes from Jan. 27. Trading on sentiment causes errors.
AMC stock will face resistance above Wednesday’s levels. Those who bought it near $20 five months ago will likely get out. That was an incredible candle that day and the bulls will have to deal with it. But therein lies a massive opportunity, because if they can overcome it, it will become a big catalyst.
If successful, AMC stock can tack on an additional 50% rally. Looking past my own opinions I practice what I preach. I am more interested in how I can profit from it than to be right on my bearishness. While I don’t agree with the fundamentals, I am not one to pass up a profit opportunity.
There are two sides to every trade, so bears also have a similar opportunity here. On its way into $20 AMC is a short with a tight stop. Traders can bet that the January failure will repeat itself. But they better place tight stops in case they are wrong.
There is a difference between trading and investing. Today, I did not discuss the latter because I started by saying I don’t believe in its fundamentals. Only facts matter to me and the P&L is bearish. It had deteriorating fundamentals even before the pandemic hit. I don’t see reasons to be optimistic as it tries to dig itself out of a big economic hole.
Stitch Fix (SFIX)
Our second pick today has an improving economic report card. Stitch Fix has been growing its sales quite rapidly for the past four years. They nearly doubled their total revenues since 2017, so they are heading in the right direction. Unlike the example above, the facts here favor the bullish thesis.
The company is still not profitable but there are no flagrant alarms. Investors in SFIX stock are pretty realistic with a price-to-sales ratio under 3. Nevertheless, the stock has had a tough time since it topped in January. Luckily and coming out of the pandemic, stitch fix rallied over 1,000% almost non-stop. That was absolutely ridiculous price action and those who chased it late paid the price. It has since shed almost 70% of its value in about three months.
As usual, investors overdid the rally and now they are trying to stabilize. SFIX recently held above $35 per share and that’s good news. This has been pivotal since their December earnings report. Back then investors loved the message and it fueled a sizable rally. The bounce earlier this month represented the bulls defending that breakout.
Now the stock will face resistance as it approaches $55 per share. It would be normal to fade a little especially after a 9% rally on Wednesday. Those who have been holding could take advantage of relief rallies. If the stock fades again, the effects could become longer term.
If, for whatever reason, the May 11 bottom fails, SFIX stock will have 25% of downside risk. Neither side can claim strong conviction. We are in bifurcated times where wild stocks are trading unreasonably in both directions. In other words, don’t rely on much to make sense, just follow the price action.
They say don’t fight the tape, and this has never been more true. If the bulls are able to break out from $55 per share, I wouldn’t want to be short. Conversely, if it loses its recent footing, I wouldn’t want to be long. The fundamentals are a selling point but remember that stitch fix is still up more than 120% in a year.
Wild Stocks to Trade: Workhorse (WKHS)
Electric vehicles and EV stocks have been hot topics for over a year. Thanks to Tesla (NASDAQ:TSLA), it is now cool to chase the electric dream. Hundreds of companies are pursuing it and a few of them are making headlines on Wall Street. Today, we consider WKHS stock and its upside opportunities, if any.
It is not one of my favorites in the sector. My top three EV stocks are Tesla, Nio (NYSE:NIO) and XPeng (NYSE:XPEV). Those are the three that actually have profit-and-loss statements that I can analyze. They have tangible values that I can compute. I’m not a fan of betting on hope of future successes.
WKHS recently fell 60% at a blistering pace. The biggest contributor for it was losing the U.S. Postal Service bid to Oshkosh. I am leery of companies whose stocks collapse because of losing only one order. Regardless of how big that order was, there should be enough fundamental reasons to look past it.
The fans of WKHS stock are very passionate about the company. More recently there was more bad news indirectly from Lordstown (NASDAQ:RIDE). Lordstown reported earnings and the message was bleak. The negative reaction there put pressure on WKHS since it’s an investor in RIDE. The lack of tangible fundamental metrics means the bulls lose all the talking points.
Somehow, both stocks rallied big on Tuesday for no particular reason. The simple explanation is that they are part of the wild stocks bunch we are covering today. Logic need not apply and they trade in unison like an asset class. You can even call them “Cathie stocks” and investors would understand. Of course, we are talking about Catherine Wood CEO of Ark Invest.
ARK’s aggressive style of trading has become an investment style of choice for new traders. I reserve the right to judge it until I see it go through a bearish market. I’m not talking about a few days of selling, but rather months of descending trends and system-wide.
WKHS stock is the type that would lose interest if we weren’t setting records in indices. Those who want to invest in it for the long term are taking a big risk. I would use spikes to get out of positions that are underwater. It is better to check the emotions at the door and do what’s right to preserve wealth.
It is counterproductive to trade based on sentiment. I’d rather use hard facts either from a profit-and-loss statement or a chart pattern. In this case, WKHS stock is lacking on both fronts. It has a lot of resistance at $10 and even stronger resistance at $12 and $14. Every ledge that the bulls tried to hold on the way down is now a problem on the way up.
If it sets a new low under the May 13 price, investors better stop out of it. Remember that stocks can fall from extrinsic factors. If the stock market corrects even just 5%, I bet this one would suffer grave consequences. As I noted earlier, neither side can claim extreme confidence. So my message here is not too short the stock but either avoid it or reduce the risk.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
