Workhorse Group (NASDAQ:WKHS) has been one of 2020’s best stocks. In just eight and a half months, WKHS stock has rallied some 760%.
To some investors, that run might suggest that the stock is due for a reversal. But that’s not how growth investing — or any kind of investing, really — should work. Even a cursory look around the market, or just the electric vehicle sector, shows that it’s not how growth investing does work right now.
Certainly, optimism toward the EV sector has contributed to the epic rally in WKHS stock so far. Clearly, there’s a growing realization among investors that electric vehicles are the future. But what we’re seeing in 2020 is an increasing awareness that it’s not just passenger cars that will benefit from electric adoption.
That’s one key reason why WKHS stock has rallied. Workhorse itself deserves some credit as well. Both catalysts should continue. As a result, so should the rally in Workhorse stock.
More Than Just Cars
WKHS is far from the only electric vehicle stock that has rallied this year. But what’s notable is the breadth of the sector’s rally.
Again, it’s not just passenger car makers that have had a big 2020 in the equity market. Commercial vehicle players like Workhorse have benefited as well. We’re even seeing EV suppliers start to go public and be similarly well-received.
The breadth of the rally makes sense. If anything, it’s surprising that it took so long. Electric motors themselves are better. They’re more fuel-efficient, more reliable, and better for the environment.
For consumers, those three characteristics are helpful. For businesses, they’re close to crucial.
Lower costs, after all, mean higher profits. Workhorse’s C1000 work van, meanwhile, is targeted for so-called “last mile” delivery services. Reliability is a must for those services, whether it’s a local business or a national e-commerce player.
It took some time for investors to apply EV optimism toward commercial vehicles. Now that they have, they’re not going to stop.
Workhorse Gets In Position
Of course, Workhorse itself has given reasons for optimism.
The biggest reason for optimism is a potential deal with the U.S. Postal Service. The USPS has said it will award the contract (or multiple contracts) for its next-generation delivery vehicle by the end of this year.
Workhorse is one of three finalists. And it’s a big deal — literally. The total award clears $6 billion.
The most recent leg of the rally in WHKS stock suggests that some investors believe the company is going to get at least a large piece of that contract. But even with that rally, the stock has upside if Workhorse delivers on that optimism.
After all, Workhorse still only has a market capitalization of just $2.4 billion. Obviously, that $6 billion isn’t all profit, so Workhorse isn’t set to make more than $2 billion just off the USPS deal.
But a win would validate the company’s capabilities. It would no doubt attract additional private companies and create a “halo effect” for the C1000.
A contract win likely leads WKHS stock higher. And it certainly seems like the market is pricing in a contract win.
The Risks to WKHS Stock
Of course, it’s important to ask: what happens if Workhorse doesn’t win the contract?
First, WKHS stock almost certainly sells off. Disappointment on the contract front is a significant near-term risk.
But a partial win or even a loss isn’t necessarily fatal to the long-term bull case. Again, EVs are the future. They’re one of the “megatrends” that will underpin this decade.
And Workhorse still has first-mover advantage in a key niche of the EV space. Valuation is not particularly onerous even after the impressive year-to-date rally.
I do believe Workhorse will get at least a piece of the USPS contract. Anyone owning WKHS stock at the moment has to believe the same.
But at the same time, it’s important to remember that the case for Workhorse stock goes beyond a single contract (even if it is a big contract). That’s because the company’s potential far outstrips a single contract.
Again, EVs are the future — and it’s not just cars. That means as long as the company executes, WKHS can keep gaining with or without the help of the Postal Service.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
