Workhorse Group Shares Are Overvalued, But Catalysts May Lift Its Stock Further

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Investors in electric vehicle (EV) company Workhorse Group (NASDAQ:WKHS) are having a great year. So far in 2020, the stock is up over 900%, shooting past $30 per share. But that metric tells only half the story. On March 17, the shares hit a 52-week low of $1.32. $1,000 invested in the firm then would now be worth over an eye-popping $22,000.

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In his Congressional Testimony on June 2019, George Crabtree, Director, Joint Center for Energy Storage Research, Argonne National Laboratory and University of Illinois at Chicago, said, “Electric vehicles are a step in the emerging transformation of transportation from exclusive reliance on personal car ownership to alternative modes of transportation, such as shared rides and mobility as a service.”

CNBC Host Jim Cramer notes that small retail investors are looking for firms, especially in the EV space, that may become the next Tesla (NASDAQ:TSLA). Therefore today, we’ll discuss catalysts as well as short-term headwinds that are likely to affect the price of Workhorse shares.

If you do not currently hold the stock, you may want to wait for a potential pullback toward the $20-level or below to build a position.

Long-Term Tailwinds Will Likely Power Many EV Stocks readers would be well aware of developments in the sector and the current hype around EV names. Mr. Crabtree further states, “Electric vehicles are poised to transform nearly every aspect of transportation, including fuel, carbon emissions, costs, repairs, and driving habits. The questions are not if, but how far, electrification will go.” Thus, the new decade will likely see a more significant shift to EVs.

Loveland, Ohio-based Workhorse Group manufactures electrically powered delivery and utility vehicles, serving specifically the “last-mile” delivery sector. Earlier in August, it announced financial results for the quarter ended June 30. Revenue was $92,000. For the quarter, operating expenses stood at $5.57 million. Net loss was $131 million, mostly due to increased interest expense, which stood high at $124.3 million.

These results alone would not suffice to push the stock up to its current levels. Investors have been buying the possibility of the award of a contract by the Postal Service that could be worth around $6 billion.

Louis Navellier has recently covered the potential effect of such a win. He concludes, “If Workhorse lands that USPS contract? Besides the huge revenue boost, couriers and other delivery businesses are going to take notice. This year’s WKHS stock gains could be just the start.”

August brought cheer to the shares for a reason other than its core operations. Workhorse Group has 10% ownership in the privately-held Lordstown Motors, another newcomer to the EV space, specializing in electric pickup trucks.

On Aug.3, publicly-listed special purpose acquisition company (SPAC) DiamondPeak (NASDAQ:DPHC) and Lordstown Motors announced a reverse-merger. As a result, Lordstown will soon become a public company.

Workhorse investors were delighted as the company’s shares in Lordstown could soon be worth considerably more. Since late July, Workhorse shares have doubled.

Should You Buy WKHS Stock Now?

Investor euphoria has been fueling shares in many electric car manufacturers such as Workhorse Group. But the company does not yet have any meaningful revenue, which means its P/S ratio is over 11,671 times.

Are you an investor who pays attention to short-term technical charts? Then you may be interested to know that various studies paint an overbought picture and urge caution. A momentum stock may stay overbought for a long time. Yet sooner or later, profit-taking kicks in, and the down moves typically happen quite fast.

Furthermore, the stock has a beta of over 2.8. That is a high number, showing market participants how risky Workhorse Group is compared to most other stocks and broader markets.

Therefore, investors who already hold significant gains in the shares may want to take some money off the table.

Those who already own the stock may also consider hedging their positions with monthly at-the-money (ATM) covered calls. Such a hedge would lower the portfolio’s overall volatility, but would still make it possible to benefit from another leg up the stock. As importantly, shareholders would have some protection from subsequent profit-taking.

Potential investors may want to wait for a decline toward the $25-level or below. Such an entry point would improve the margin of safety.

The Bottom Line

Shareholders in Workhorse Group have so far had a remarkable year. Will the joy-ride continue in October?

The company is not yet an established EV firm as it does not have any sizable sales. Many of its eggs are in the potential USPS contract basket. Therefore, it is still a speculative investment. Investors should be ready to embrace a roller-coaster of a ride in the stock.

In the long run, Workhorse Group may find itself an acquisition target, creating exceptional shareholder value.

If you would like to invest in the business prospects but do not want full exposure to the choppiness offered by a single stock, you may consider investing in an exchange-traded fund (ETF) that also has Workhorse as a holding. Examples include the SPDR S&P Kensho Smart Mobility ETF (NYSEARCA:HAIL), the Invesco WilderHill Clean Energy ETF (NYSEARCA:PBW), and the ARK Autonomous Technology & Robotics ETF (NYSEARCA:ARKQ).

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. Besides formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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