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For the time being, NKLA and TSLA are like oil and water
By Josh Enomoto, InvestorPlace Contributor Aug 21, 2020, 11:48 am EDT
I’m not a big fan of shorting stocks, or at least not discussing the concept. Early in my contributions for InvestorPlace, I dabbled a bit with being directly negative with certain companies. Almost always, it never goes down well, with certain folks misinterpreting what it means to be short. However, with Nikola (NASDAQ:NKLA) stock, you won’t have that problem.
Source: Nikola Press Center
You see, if you’re not convinced that the rally in rival Tesla (NASDAQ:TSLA) is sustainable, you can essentially achieve a short position simply by buying Nikola stock. That way, you don’t have to worry about being negative on anything. You’re simply choosing a different course of action than the rest of the crowd.
To be crystal clear, I’m not recommending a bearish position on Tesla. Especially with the exuberant environment we’re in, going short could get very ugly. However, I can’t help but notice an unusual dynamic between TSLA and Nikola stock that shrewd traders could possibly exploit to their advantage.
Nikola Stock as a Near-Perfect Hedge Against TSLA
More than a few investors likely believe that Nikola stock trades in sympathy with its bigger rival. After all, Tesla essentially pioneered the electric vehicle market. And what’s good for Tesla should trickle down to other EV players.
But that’s not what’s actually happening. Instead, since Nikola went public via a special acquisition company, the relationship between NKLA and TSLA is one of opposites. Specifically, the two stocks share a correlation coefficient of -63%. In other words, this is an inverse relationship – as TSLA goes up, NKLA moves lower, and vice versa.
Click to EnlargeSource: Chart by Josh Enomoto
Interestingly, when you take the correlation coefficient of the pair from June 11 onward – and thereby eliminate the initial excitement of a public debut – you yield a much stronger inverse relationship; a correlation coefficient of -78%.
You don’t have to be a math whiz to recognize the validity of the above calculations. Just by looking at a chart of the two securities, you can tell that they’re like oil and water. Under this environment, if you want to hedge against volatility in TSLA, you can simply buy Nikola stock. Should Tesla encounter weakness, chances are, TSLA will swing higher.
Of course, no guarantee exists that this dynamic will play out indefinitely. However, I find it odd that the two companies are almost mirror opposites of each other. Sure, they compete against each other. But a rising tide lifts all boats. Some boats may rise faster than others, but what’s good for one boat is generally positive for all others.
In this case, what we’re seeing is a zero-sum game. With a sector that should benefit from more choices and competition, this dynamic is rather jarring.
Encouraging Narrative for NKLA
For those that want to stick with a surer bet in Tesla, I understand. Right now, most of the enthusiasm associated with Nikola stock is theoretical. While Nikola is setting production goals, Tesla is already producing. That’s a huge distinction which clearly benefits TSLA.
However, it’s fair to point out that you pay a hefty premium for that distinction. By directing capital to Nikola stock, you’re betting that the underlying company is the one to directly challenge Tesla. So far, many are avoiding that direct confrontation, instead electing niche EV markets, such as Electrameccanica Vehicles (NASDAQ:SOLO) or Ayro (NASDAQ:AYRO).
Personally, I’m willing to take a shot on NKLA stock. While I appreciate the extremely passionate fan base for Tesla vehicles, I believe the disrupter is ripe for disruption. No, I don’t think that Tesla will suddenly become irrelevant. But after years of the same – dare I say it, boring – design, I believe consumers are longing for viable options.
What distinguishes Nikola is that the company isn’t trying to reinvent the wheel. Rather than trying to force the consumer to accept something over the top (see Tesla Cybertruck), Nikola is going for something classic yet innovative with its Badger electric pickup truck.
Moreover, big corporations are gradually recognizing Nikola’s potential. For instance, Nikola secured a minimum order of 2,500 electric refuse trucks from waste management company Republic Services (NYSE:RSG). With full production deliveries scheduled for 2023, Nikola is moving at a rapid pace.
And therein lies the double-edged sword of electric vehicles. Their relative ease of manufacturing makes EVs suitable for disrupting combustion-engine car manufacturers. At the same time, the accessibility of EV manufacturing invites competition that can get up to speed quickly.
A Compelling but Risky Proposition
Ultimately, any company that dares challenge Tesla will have its hands full. Not only is TSLA a vertically integrated behemoth, it has established its brand name in the EV space. In that sense, Tesla is akin to Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google or Amazon (NASDAQ:AMZN).
However, cars are a different animal. Consumers want options because they’re forking over a ton of money. Typically, you’re going to spend at least a few years behind that wheel. Therefore, most people want what suits them as perfectly as possible, not to settle for a brand because that’s the only one available.
In that sense, Nikola stock could experience some pent-up demand from EV consumers who have essentially been funneled into the only choice for pure EVs over the last several years. For a “dumb money” bet, I think this could work out.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long NKLA.