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WKHS Caught Up in the 'Meme' Mania: Time to Cash Out?

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Workhorse’s (WKHS - Free Report) shares have surged around 60% so far this month. In the absence of any fundamental factor or development, this rally has been solely driven by the hype on subreddit r/wallstreetbets. The stock has been among the top 10 most discussed stocks on the Reddit forum lately, which helped it attract significant attention from retail traders.

What are meme stocks? While it is hard to define, meme stocks are typically characterized by high trading volumes not because of any underlying strength of the company but due to immense hype on social medial platforms like Reddit, Twitter and Discord. These stocks generally have high short interest from institutional investors, thereby raising the chances for a short squeeze, wherein stock prices start rising amid social media frenzy, forcing short sellers to exit their positions. As the short sellers start buying to square-off their positions, it creates a snowball effect, with the stock witnessing a drastic price increase. While sudden rallies in such meme stocks may generate lucrative returns for retail investors overnight, it may also quickly catch traders offside, given the extreme volatility associated with them.

Of late, electric vehicle player Workhorse has been having a gala time in the meme stock party with the likes of Clean Energy Fuels Corp (CLNE - Free Report) , AMC Entertainment (AMC - Free Report) and Blackberry (BB - Free Report) . With more than 40% of float sold short, Workhorse has become one of the most widely discussed stocks on social media platforms. It was the fourth most discussed stock on Reddit WallstreetBets forum yesterday. Given a high short interest ratio and the rising popularity in social media, Workhorse could be an attractive short squeeze candidate. While the company may offer short-term return potential to Reddit investors, it could be a risky bet. And you should only place a bet on this stock if you have the guts to play with fire.

Despite any significant development or announcement by the company, the stock price of Workhorse has witnessed astonishing gains on a month-to-date basis. The company’s fundamentals are weak and do not justify its valuation metrics. Workhorse’s valuation has got out of hand, with the current EV/EBITDA being 278.74X versus the industry average of 11.16X. It has a P/S ratio of 12.82 versus the industry average of 1.04.

Workhorse is highly leveraged, which restricts the firm’s financial flexibility to tap growth opportunities. The company’s income is getting marred by mounting capex, and SG&A as well as R&D costs. In the last reported quarter, it incurred a loss of $1.04 per share, way wider than the Zacks Consensus Estimate of 19 cents. The company also missed the consensus estimate for revenues. Soaring commodity costs and supply chain distortions amid global chip shortage make the prospects bleak for the stock. Workhorse’s loss of the U.S. Postal Service contract has further deteriorated the stock’s outlook.

Amid such weak fundamentals, the short interest in Workhorse has been high, in turn raising the possibility of short squeeze. Discussions about the stock on the Reddit chat room have been on the rise over the past week, with retail investors revving their efforts to take on short-sellers. As such, Workhorse’s share price popped up this month and may have more upside potential in the coming days. With the fundamentals having little to do with stock price movement now, Workhorse seems to be in the hands of the traders and social media as of now, and is not for rational investors.

Well, stocks are shorted for a reason. So, investors who want to bet on such stocks must be ready for volatility, as the shares of such companies will eventually plunge back to Earth.  Workhorse seems quite a speculative stock, with not much fundamental strength and lack of a sustainable business model. We won’t advise investors following a fundamental approach to take a plunge on this stock even if it keeps on soaring. Also, high short interest in a stock is not necessarily an indication of a short squeeze. So, if you have this stock in your portfolio and are waiting for a right exit, don’t wait further in the anticipation of more gains. Workhorse currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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