Nikola Stock Might Be an Interesting Contrarian Play Now

Everyone knows about how Nikola (NASDAQ:NKLA) stock fell from its peak amid the ridiculous tenure of CEO Trevor Martin and his ignominious departure. Since then, the company lost its orders and other potential partners bailed out on the previous deals. NKLA stock has fallen to $13.40 as of March 25 from its previous peak of $79.73 in June 2020 and is down 26% in the past 6 months.

But maybe now, as a sort of knee-jerk contrarian move, speculative investors might look at inching back into NKLA stock.

I suspect that this goes against the grain of most institutional investors and certainly the value investing crowd. But I think there are some interesting things to look at.

Reasons to Start Looking Nikola Now

First, the board of directors is now composed of nine non-Nikola executives, plus the new Nikola CEO, Mark Russell. He is not the chairman, like Trevor Martin, as that role is filled by the former SPAC (special purpose acquisition company) sponsor VectorIQ, Steve Girsky. Recently, two outside independent directors were brought in.

This is a good start, as governance was completely lacking before when Martin was in charge.

Second, the company has laid out a clear set of objectives for this year. If they don’t meet them it might be grounds for pushing NKLA stock down. Nikola reiterated these milestones in its Feb. 25 release of 2020 earnings. Halfway through the release, the company discusses its business outlook, including a list of five “milestones” it expects to achieve during 2021.

Granted, none 0f these seem to have any financial numbers associated with them. The closest that it comes to this is to talk about trial production in Q3. Both its Ulm, Germany JV plant, and the plant in Arizona (just south of Phoenix in Coolidge), will start trial production. I believe this is for the company’s BEV (battery electric vehicle) trucks.

The point here is that if any of these milestones are not met, NKLA will drop further. But, consider the opposite. If Nikola achieves its milestones in 2021 there will be grand announcements. Management will talk about its next steps, the economics of sales, production numbers, and maybe new orders. This will push NKLA stock higher.

Third, Nikola had $845 million in cash as of Dec. 31. Cash burn during 2020, (cash flow from operations plus investing activities) was $181 million. At that rate, which includes SPAC merger expenses, it would take 4.66 years to spend all its cash.

How to Play NKLA Stock From Here

This is not a value play. It’s speculative. Maybe we can put some odds on likely outcomes.

Let’s say there is a 50% chance that the company will meet its milestones in 2021. There is a 30% chance that it won’t. And lastly, a 20% chance that more bad news, including desultory drifting by management and the board occurs. These three scenarios all add up to 100% of the likely outcomes for purposes of our expected return analysis.

Scenario 1 above is positive for the stock, so let’s say it leads to a 40% jump in the price. Scenario 2 is bad for NKLA stock, but if management says it expects to achieve the milestones in early 2022, the stock would falter but eventually recover somewhat. Let’s give it a net 20% drop. The last scenario would wear and tear on NKLA stock and likely lead to a 50% drop in the price.

We have three expected returns. Scenario one results in a 40% gain with a 50% chance it happens. Therefore, the expected return (ER) is +20% (40% times 50%). Scenario 2 is -20% times 30% (ER of -6%). And the last scenario is -10% (-50% times 20%).

Therefore, the total probability-weighted ER is +4.0% (i.e., 20% minus 6% minus 10%). In other words, there is a slight possibility of a positive return, not a negative return from here. It might pay to be a contrarian here and start accumulating NKLA stock.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.