Relentless innovation in the long-haul transport space, the rise of investing with ESG principles in mind, and the allure of new companies going public have spurred big moves in NKLA stock and scores of others last year.
Back in May, Nikola (NKLA) traversed above a 50-day moving average that later began to bend higher. Bullish. The fuel cell and battery electric truck start-up also finished the second quarter up almost 30%. Yet the third quarter disappointed most investors.
NKLA stock plummeted after releasing its second-quarter update. The company lost 20 cents per share — the most of any quarter since at least the third quarter of 2019. In late August, shares sank to a new all-time low of 9.02 since its Nasdaq debut in June 2018.
Nikola enjoyed an 11% gain in the final week of October. And shares at one point climbed 45% since the start of Q4. Amazing rebound. Yet the stock has made another swan dive back below 10 and is struggling to stay off its multiyear lows.
Shares rebounded nicely this past week, rising 3% to stem a tough three-week slide.
So for those seeking the best growth stocks, is NKLA stock a buy now? Or is it time to sell, cut losses, and search for a better growth stock?
This story will examine the stock through the lens of IBD’s time-tested, research-driven CAN SLIM method, a seven-point paradigm for successful stock picking.
Third-Quarter Update
In its Q3 announcement, the company highlighted progress in building out its sales and service network. Dealers now encompass 130 locations across 28 states. Nikola expects to deliver up to 25 Tre BEV (battery electric vehicle) trucks by the end of 2021.
In addition, Nikola has begun testing of the Tre FCEV, running on hydrogen fuel cell technology. Its Ulm, Germany-based joint venture factory opened in September. And finally, Nikola has placed $125 million in reserve to fund a potential settlement regarding its former company founder with the Securities & Exchange Commission.
“Validation of the Nikola Tre BEV is progressing, with trucks now being test-driven and tested on public roads,” CEO Mark Russell said in a news release.
Wall Street expected the company to lose 25 cents a share. Instead, Nikola posted a net loss of 22 cents.
On Oct. 14, PGT Trucking announced it signed a letter of intent to lease 100 Nikola fuel cell electric vehicle (FCEV) trucks. PGT specializes in multi-service flatbed truck transportation. It expects to receive deliveries in 2023 when production starts at Nikola’s Coolidge, Ariz., plant.
Leading Vehicle Stocks Today
A few companies in Nikola’s automaker industry group are far outperforming this year. Check out Lucid Group (LCID) (99 RS Rating), Ferrari (RACE) (90), China’s Xpeng (XPEV) (87) and General Motors (GM) (90). All five hold a Relative Strength Rating of at least 85 or higher. Why care? These stocks outperform at least 85% of all companies in the IBD database over the past 12 months.
In turn, NKLA’s Relative Strength Rating in October spiked to a respectable 75 on a scale of 1 to 99. A 75 means the stock is outperforming 75% of all companies in the IBD database in terms of 12-month price performance. But after a big drop in the past few weeks, Nikola’s RS Rating has deflated to a disappointing 15.
Please go to IBD Stock Checkup to see which companies in IBD’s automakers industry group rank No. 1 or No. 2 in key rankings, including RS, Earnings Per Share Rating, and Composite Rating.
Should You Avoid NKLA Stock?
Back in June, NKLA struggled in reclaiming its long-term 200-day moving average. You can see similar action with the 40-week moving average, drawn in black, on an Investors.com weekly chart.
Even before the recent slide, the stock had already wreaked a tremendous amount of shareholder damage.
Following the late-February report on fourth-quarter results, Nikola lost support at the key 10-week moving average. NKLA stock is now submerged more than 88% below an all-time high of 93.99.
At this stage, even after recent gains, NKLA would need to rally more than eight-fold just to return to that all-time peak.
Nikola Stock: Is A Short Covering Rally Under Way?
Short interest in Nikola is still elevated.
According to MarketSmith data on NKLA’s weekly chart, it would take 4.7 times the stock’s average daily volume of 11 million shares to cover all open short-sale positions.
Put another way, short interest of 51 million shares comprises nearly 18% of the entire float. So, if a powerful rebound arises on a change in perception regarding the company’s future, more short sellers may feel pressure to buy back shares and cover their positions.
Think of short interest as nitro fuel for a strong stock. This could give NKLA stock a further boost. And that extra boost might be happening now.
Nikola Corporate History
Nikola debuted on the Nasdaq on March 3 through a merger with VectoIQ Acquisition. This special purpose acquisition company (SPAC) traded under the symbol VTIQ. The transaction reflected an implied enterprise value of $3.3 billion. Nikola announced it would use the proceeds to build out a hydrogen station infrastructure to support its FCEV vehicles, including the Tre and the Two.
The firm describes the Tre semi-truck as a “re-imagined cabover with battery-electric and fuel-cell electric powertrain options” and the Two as a “high-efficiency hydrogen fuel-cell sleeper for long-haul applications.”
Longer term, Phoenix-based Nikola expects to clock significant sales as it makes progress on building a semi-truck powered completely by electric batteries. Earlier this year, Nikola completed the assembly of five Tre BEV (Battery Electric Vehicle) prototypes, and these trucks are in the commissioning process.
Executives also say they hope to break ground on the firm’s first commercial hydrogen station as well as a centralized hydrogen production facility. Another second-half milestone goal: announce additional hydrogen infrastructure and ecosystem partners.
A Long-Term Hydrogen Fuel Play?
Global interest in hydrogen fuel is attracting investor interest in Nikola stock.
In mid-April, the company unveiled plans to create a hydrogen pipeline network in Germany with its partners CNH Industrial (CNHI) and OGE, which operates natural gas pipelines. On April 29, Nikola announced a deal with TravelCenters of America (TA) to install hydrogen refueling stations for heavy-duty trucks at two sites in California. These sites may begin operation as early as the first quarter of 2023.
On June 17, NKLA rallied 7.9% in accelerating turnover on news that it has agreed to develop a full line of zero-emission heavy duty trucks with CNH Industrial (CNHI). On June 22, Nikola said it’s investing $50 million in cash and stock for a 20% equity stake in the clean hydrogen project being developed in West Terre Haute, Ind. The goal here? Convert solid waste byproducts such as petroleum coke with biomass to create clean, sustainable hydrogen.
On July 29, shares plunged 15% to 12.03, hitting the lowest price level since May, on news that Nikola founder and former chairman Trevor Milton faces three counts of criminal fraud. Dow Jones reported that the 39-year-old entrepreneur could face up to 25 years in prison if convicted on all counts. Milton pleaded not guilty in a Manhattan federal court.
On Sept. 2, the company announced a pact with Bosch to manufacture fuel cells. And on Sept. 15, Nikola said it and IVECO, the commercial vehicles unit of CNH Industrial, signed a pact with the Hamburg Port Authority to supply up to 25 Nikola Tre BEVs for delivery throughout 2022.
NKLA Stock Today: Miles Below Its Peak
The stock vaulted 475% after breaking out of a cup-without-handle chart pattern with a 16.35 buy point in early May 2020. But today, NKLA stock is still in the early innings of recovery after making a grand swan dive.
Since the company has no sales or earnings, there’s no way to determine if the company will in fact meet two key criteria: excellent growth in both profits and sales on a quarterly and annual basis. The C in CAN SLIM stands for current growth. It demands robust year-over-year increases in earnings and sales in the latest quarter, preferably at 25% or more.
According to its 10-K filing to the Securities & Exchange Commission, Nikola showed total shareholders’ equity of $987 million at the end of 2020. The company saw negative operating cash flow the same year at -$150.5 million and positive cash flow from financing activities of $941 million.
The S In CAN SLIM
The S stands for supply vs. demand for shares. Nikola has reduced its float to 287 million shares. It shows 404 million shares outstanding. Management owns 16% of the shares outstanding, according to MarketSmith. This means that executives are dining on their own cooking.
Meanwhile, more mutual funds own a stake in Nikola. Ownership at one point jumped to a record 244 funds in the September-ended quarter. An impressive rise from just 23 mutual-fund owners at the end of Q3 in 2019.
You’d like to see the number of funds owning shares continuing to grow. This would help meet the I in CAN SLIM, IBD’s seven-point paradigm of winning stock investing. Why? The best mutual funds have analysts who scour the company’s financial statements, do exhaustive market research, and even meet with company management and competitors. Ownership by a top-performing fund is an endorsement of the quality of the company.
The L In CAN SLIM
Does the company lead the auto manufacturers industry group? Not now.
According to IBD Stock Checkup, the stock recently shows a Composite Rating of 24 on a scale of 1 (horrendous) to 99 (heavenly). In general, top growth stocks show a Composite score of 90 to 95 or higher at the start of their big price runs.
Nikola’s Accumulation/Distribution Rating now shows a negative D- grade on a scale of A to E. A grade of C+ or higher denotes net institutional buying by mutual funds, banks, insurers, and pension funds over the past 13 weeks.
Is NKLA Stock At A Buy Now?
At this point, NKLA stock is nowhere near a proper buy point.
Why? The stock has not yet created a bullish chart pattern. Look for these: the cup with handle, double bottom and flat base.
NKLA still has quite a long way to go before completing the right side of a new base. You need a solid base to form before it can break out to new 52-week or all-time highs. A superb breakout gives intrepid traders a chance to make maximum portfolio gains in minimal time.
Nikola stock also needs to climb back above the 50-day line and retake its long-term 200-day moving average, drawn in black on all IBD charts. For a while, that was the case. And the right side of its cup, lodged within a much deeper bottoming base, had been forming quickly.
A potential entry near 19.54, a dime above the four-month base’s left-side high briefly came into view when shares poked above 15. Regardless, this base is unusually deep, showing a 54% correction from head to toe. Yet, sometimes a deep cup with handle or similar pattern can bear fruit.
So at this point, Nikola is not a buy.
Will NKLA begin to truly etch the right side of a good base? A strong move that gets the stock past its near-term high of 15.56 could in fact justify an aggressive entry point with the use of a well-drawn trend line.
Don’t forget the golden rule of IBD investing, too.
If you buy at a proper buy point and expectations get broken, cutting losses short to protect your hard-earned capital allows you to invest in a more promising growth company in the near term. Or you can target the same stock in better market conditions.
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