Investors on Wall Street have lost their confidence of late. After setting records in January, the S&P 500 fell 12% by month end. Regardless of from what they stem, the fears are most likely irrational. The prevailing idea now is that investors are afraid of rate hikes. If that’s the case, their worries are not from facts. (More on that later). Regardless, the correction has created opportunities in good companies like Nio (NYSE:NIO). Nio stock fell 43% in January alone, and 60% from its January 2021 high.
Nio has certainly had better years than the last 13 months or so.
In early January, investors panicked and sold everything in unison. The pain was across all sectors and it did not discriminate between what’s good or bad. The small-caps suffered the swiftest blows at first, then the mid-cap stocks, which added to NIO’s woes.
The technical necklines that this pain triggered failed so fast that they priced out their targets in one week. Investors ripped the Band-Aid so quickly, that the bounce rallies have already been fast and furious.
For example, since Friday, Nio stock has already rallied almost 30%. This makes it hard to argue for initiating new bullish positions chasing that exuberance. But investors with a long-term prospect on it can certainly nibble.
Under $20 per share, NIO was a bargain. However, and in the throws of the correction, it was daunting to be a hero. Technically, it could have followed the markets lower had the indices not stabilized.
Even though I was confident of NIO’s levels below, I could not say the same for the indices. Since NIO does not trade in a vacuum, it would have also continued falling.
NIO Stock Metrics Are Compelling
Unlike the stock, the company is on solid fundamental footing. There are no problems anywhere in their financial metrics. Revenues are now more than $5 billion, with almost $1 billion in gross profit. This is a threefold improvement in about two years. Moreover, the overall electric vehicle (EV) market is thriving. Thanks to the hard work of Tesla (NASDAQ:TSLA), the whole world is now chasing the trend.
The internal combustion engine has serious competition, albeit it will take time to die. For now, NIO has an early mover advantage second only to Tesla. Even General Motors (NYSE:GM) and Ford (NYSE:F) are playing catch up to it in EV unit sales. Eventually it will be easy for those two to lurch into the second and third spots. But for now NIO is a serious EV contender.
The company operates in the largest market with the help of the local government in China. Unlike Alibaba (NYSE:BABA), so far it has escaped the negative political headlines. There are no guarantees this continues, at least for now it’s not a worry to fret.
Management will report earnings in early March. The short-term reactions to those headlines are binary. As such, they present temporary uncertainty that is not necessarily from management mistakes.
The Extrinsic Risks May Persist
Also, the indices may have not finished correcting yet. We have had great progress in the last three days, but there are still bearish technical triggers looming below. The fear of rate hikes has ballooned into unreasonable size. There is little chance that the Fed will be aggressive with its quantitative tightening. They just spent trillions of dollars reflating the economy, it would be nuts for them to break it on purpose.
Headlines aside, I suspect that we should continue recovering from the selloff. If that’s the case then NIO stock should drift higher. It will face challenges going into $30 per share, and more $7 above that. But, this is a stock that can do it, as we’ve seen many times before.
Last year NIO rallied almost 80% from the May base in under two months. The bulls are not shy about chasing higher prices. Overtime, the bullish thesis in this company is a viable one. Therefore, by definition, large corrections are entry opportunities and not reasons to panic.
Although there is still is room to fall, I doubt it goes there alone. The progress management is making is just too good to harbor such negativity.
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.
