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 over the past year.
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Consider fuel cell and battery electric truck start-up Nikola (NKLA). Shares are clearly igniting a new price run, off to a good start in possibly racking up a fifth week of gains in six. Plus, back in May, NKLA stock traversed above a 50-day moving average that has now begun to bend higher. Bullish.
The stock finished the second quarter in bullish style, gaining almost 30%.
On June 17 alone, 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). Nikola also announced a deal with Tumim Stone Capital in which the asset manager would buy up to $300 million of the company’s common shares.
Is NKLA Stock Healthy?
So for those seeking the best growth stocks, is NKLA stock a buy now?
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.
Amid recent gains, Nikola’s market value of $7 billion puts it solidly back into midcap stock territory. Surely, it can be tempting to buy at “bargain-basement” prices and try to hold for the long pull.
Also good? NKLA is aiming to reclaim the northern territory above 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.
However, please keep in mind that the rebound follows a tremendous amount of shareholder damage.
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Following the late-February report on fourth-quarter results, Nikola lost support at the key 10-week moving average. NKLA stock is trying to rebound off 52-week lows but is submerged 80% below an all-time high of 93.99.
At this stage, even after recent gains, NKLA would need to rally five-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 2.9 times the stock’s average daily volume of 14.9 million shares to cover all open short-sale positions.
Put another way, short interest of 43 million shares comprises 15% of the entire float. This figure has dropped from 21%. So, if the rebound strengthens, even more short sellers may feel pressure to buy back shares and cover their positions.
This could give NKLA stock a further boost.
Nikola Corporate History
Nikola debuted on the Nasdaq on March 3 through a merger with VectoIQ Acquisition, a special purpose acquisition company (SPAC) that formerly traded under the ticker 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.
Nikola also noted that it had more than 14,000 pre-orders “representing more than $10 billion in potential revenue and 2-1/2 years of production.”
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.”
Certainly, 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 in the European economic powerhouse. And 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 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.
NKLA Stock Today: Still 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.
Investors responded bearishly to its fourth-quarter results and update on Feb. 25.
NKLA stock tanked more than 15% for the week. Shares plummeted another 17% in the week ended March 5 on a downgrade by JPMorgan Chase. Analyst Paul Coster reportedly cut his price target to 30 from 33 for “tactical reasons.”
On March 18, Nikola dropped more than 9% in heavy turnover on news that investor Hanwha of South Korea intends to sell up to 11.1 million shares of NKLA stock. At the time, the company owned a 5.65% stake, according to SEC filings. Hanwha also supplies solar panels for Nikola’s hydrogen-fueling network infrastructure.
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Still, Phoenix-based Nikola remains upbeat and 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.
“In the fourth quarter of 2020, Nikola made the necessary changes to refocus and realign the company,” CEO Mark Russell said in a news release. “You have seen us restructure our agreement with GM, cancel our battery electric refuse truck program, discontinue our Powersports program and realign the company’s resources with laser focus on our core businesses: battery electric and hydrogen fuel-cell electric (FCEV) heavy-duty trucks, and hydrogen refueling infrastructure.”
NKLA Stock Rising Since Q1 Report
Nikola reported first-quarter results on May 7 and reaffirmed timelines for production and delivery milestones. It posted a net loss of 14 cents a share vs. a net loss of 12 cents a year earlier. That beat a consensus view for a net loss of 27 cents.
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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 279.6 million shares. It shows 394 million shares outstanding. Management owns 16% of the shares outstanding, according to MarketSmith. This means that executives are still dining on their own cooking.
Meanwhile, more mutual funds own a stake in Nikola. Ownership recently jumped to a record 157 funds at one point during the March 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.
Fidelity Growth Company (FDGRX), which holds an A+ rating from IBD for three-year performance, has 0.01% of its assets in NKLA stock.
The L In CAN SLIM
Does the company lead the auto manufacturers industry group? Not right now.
According to IBD Stock Checkup, the stock gets a weak Composite Rating of 7 on a scale of 1 (horrendous) to 99 (heavenly). One reason for the weak grade? Nikola stock shows a Relative Strength Rating of 15; yet this means it’s outperformed only 15% of all companies in the IBD database over the past 12 months.
In general, top growth stocks show a Composite score of 95 or higher at the start of their big price runs.
On the positive side, Nikola’s Accumulation/Distribution Rating shows a positive A- 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. MarketSmith data reveals zero institutional ownership by either banks or insurance companies.
Is NKLA Stock At A Buy Now?
At this point, NKLA stock is nowhere near a proper buy point.
That is, the stock has not yet created a bullish chart pattern such as a cup with handle, a double bottom or a flat base.
The best stocks, after running up significantly in price, tend to correct in price as some holders take profits. But they eventually bottom out, work their way through overhead supply, and rise to within 5% to 15% of their 52-week or all-time highs. That kind of rebound tends to mean that the shares held by willing sellers have now mostly gone to firmer hands in the market.
NKLA still has quite a long way to go before completing the right side of a new base and staging a breakout to new 52-week or all-time highs. A superb breakout gives intrepid traders a chance to make maximum portfolio gains in minimal time.
Notice on a daily chart how the stock is getting closer to climbing back to the north side of its long-term 200-day moving average. Doing that would be a great start. But at this point, Nikola is not a buy.
Please follow Chung on Twitter: @saitochung and @IBD_DChung
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