Today we debate the viability of initiating new positions in Workhorse (NYSE:WKHS). WKHS stock is down on its luck but it would be unfair to count it out.
First, it is important to revisit the macro conditions before we commit. This is the playground in which all stocks have to play. The equity markets are still on fire but with too many artificial tailwinds.
The Federal Reserve more than succeeded in its efforts to reflate the economy. Their inflationary efforts had already started in 2018, so they are long in the tooth. The indices keep breaking records on Wall Street. As a results we have inflation on main street. The CPI and the PPI are finally showing it now. Nevertheless, they are ignoring that, so buying the dip in quality stocks still works.
WKHS Stock Has Merit
Trading electric vehicle stocks has been a nauseating adventure for the past year. Owning them is a rough ride of extreme highs and lows. It is finally exciting to see a legitimate threat to unseat the internal combustion engine. The opportunities within that battle are vast. However, there will be obstacles and not all will win. This morning we learn of regulatory hiccups for Lordstown Motors (NASDAQ:RIDE).
Workhorse has incredibly strong fans. But, WKHS stock has seen its fair share of love and hate. It fell as much as 80% from its $42 high mark. It is now still 70% cheaper and cannot find a bottom this week.
The company lost a big order from the U.S. Postal Service, which broke its stock momentum. The headline caused it to lose more than half its value in mere hours. They haven’t seen a significant recovery from it yet. I would have expected a quicker bounce from it. One order should not break a company stock regardless of how big it is.
Fundamentals Are Still Maturing
The company needs time to build stronger fundamentals. Workhorse has a niche market, so expectations may have temporarily exceeded reality. Not all EV stocks can be Tesla. That was a unique circumstance and there’s also only one Elon Musk.
At least Workhorse actually currently has a profit-and-loss statement. They are growing sales but are still comparatively tiny. There could be problems from the love that investors have for WKHS stock. Its fans are too brave and with great conviction.
Under normal circumstances, I would say this would be supportive WKHS stock. But in this case it could be detrimental to the owners. The combination of indices altitude and investor stubbornness is cause for concern. The risk of suffering big losses is high in case of a crash.
This is not a dis against the company. Great ideas have struggled on Wall Street before and will struggle again. There are no sure things.
There Are Opportunities for All
While the fundamentals are gathering strength, there are technical trading opportunities. They say that “price is truth,” so the truth resides in charts and technical analysis.
For example, in late April I suggested there could be tough time coming. The stock subsequently fell 40% to its $8 low. It did recover and failed at the upper edges of our range. It’s not voodoo, machines are in charge and somewhat predictable short term. Us humans can do well against them if we can overcome our emotions.
The WKHS stock action of late is between $8 and $18 per share. The buyers and the sellers have rejected both edges. Therefore, I expect them to ping-pong between the two. When either of those sides break, they will overshoot in that direction. Until then, traders can profit from the swings inside of the sideways channel. If the markets hiccup, it could slip back into its lows.
Investors who are in it to win it can wait for the long haul. Consensus is that the electrification of the global vehicle is a gimme. If so, it will take years for it to happen. The internal combustion engine is too ubiquitous to flip on a dime.
Meanwhile, the opportunity with WKHS stock is real. The thesis of its success over time is valid. Onus is on management to keep delivering good scorecards and headlines to support that. Until then, they have loyal fans on Wall Street to help prop the stock.
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.