The One Profit Play I See in the Nikola Scandal

Would-be electric truck maker Nikola Corp. (NASDAQ: NKLA) is one of the biggest stocks of the mobile-investing craze of the past six months. Its stated goal is to "transform and disrupt the transportation industry globally."

Last time I checked, the global transportation sector was worth in the neighborhood of $6.5 trillion, so there's no denying Nikola is aiming high. As I've said many times here, the electric vehicle industry is the future. Tesla Inc. (NASDAQ: TSLA) has blazed the trail and proven it. (Get it? Nikola? Tesla?)

It's just that Nikola hasn't really built anything yet.

With a $30 billion market cap, it's the world's biggest truck maker that hasn't built or sold a single truck. Nikola's ideas and concepts are awesome, but there's no getting around the fact that they're just ideas and concepts.

That hasn't stopped retail investors from snapping it up. NKLA shares have been on a wild ride since the pandemic started. At one point in early June, the stock scraped the $80 level, and it still sells for more than three times what it did at its IPO.

But now the company is under attack by a very aggressive short-seller. These attacks have already slammed the shares by as much as 36%; there's no telling how much the short-seller may have made in the process.

It's more important than ever for regular investors to know just what's going on here, because there is a profit play to be made...

This Is an Old-School Tactic We've Seen Before

Cleverly-named Hindenburg Investment Research released a report last week that, essentially, accused Nikola of being an "intricate fraud."

In its own words, Hindenburg specializes in what it calls "forensic research" and "activist short-selling." It scours the ends of the Earth for "hard-to-find information" from "atypical sources," looking for "situations where companies may have any combination of (i) accounting irregularities, (ii) bad actors in management or key service provider roles, (iii) undisclosed related-party transactions, (iv) or illegal/unethical business or financial reporting practices."

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You can see why short-sellers, who can make money when stocks tank, would be very, very interested in this kind of information.

This is a tactic as old as the market itself; release a scathing report with a blizzard of accusations - right or wrong - and get in "on the other side," in position to profit.

In a research note entitled - I'm not kidding - "Nikola - How to Parlay an Ocean of Lies into a Partnership with the Largest Auto OEM in America," Hindenburg made some eyebrow-raising claims:

  • That General Motors Co. (NYSE: GM) made a deal with Nikola out of desperation.
  • That there's no Nikola Tre in pre-production.
  • That Nikola has no functioning prototype for the Nikola One, Two, or Tre.

There were 22 bullet points with allegations in the press release alone. Hindenburg's report was 67 pages long.

As you might imagine, when this bombshell went off, Nikola shares, which had been above $50 in intraday trading last Tuesday, dropped like a rock to the point where they were trading near $32 on Friday.

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Again, there's no telling how much money a NKLA short-seller might've made. Short-sellers aren't really required to disclose those positions.

The U.S. Securities and Exchange Commission (SEC) and the U.S. Justice Department both indicated they'd be in touch, too.

So Nikola's founder, Trevor Milton, released a six-page statement rejecting Hindenburg's claims. The company also said it had "briefed the Securities and Exchange Commission regarding its concerns about the report." Nikola also has acquired a law firm regarding potential legal action and engaged the services of public relations firm Joele Frank.

Hindenburg then hit back, with a response to a response, entitled "Nikola's Response Has Holes Big Enough to Roll a Truck Through." Hindenburg noted Nikola had only responded to a handful of its concerns.

We're still waiting to see if Nikola will respond to the response to its response. Though I can't help but notice there's one claim in particular that Nikola couldn't refute...

Back in 2016, Nikola released a promotional video hyping up the future of the company. It showed the highly anticipated Nikola One truck driving rapidly along a two-lane highway - fully functioning. But Hindenburg called the company's bluff - claiming that the Nikola One wasn't anywhere close to being functional.

And that wasn't all. Hindenburg also claimed that Nikola had towed the truck to the top of a small hill and let it roll down. The company allegedly tilted the camera to make it look like the truck was moving on its own.

Nikola's lengthy press release refuted many claims, but when it came to the Nikola One, the company admitted that the truck wasn't actually functional. And it seems like investors didn't take kindly to the news; the stock plummeted (again) once the news was released.

As I said, we've seen this tactic before including, interestingly enough, with "granddaddy" Tesla. Tesla fended off the last bear attack and has since gone on to become one of the most valuable carmakers in the world and the reigning king of electric vehicles.

Some investors are probably hoping Nikola will do the same, and find redemption - with its stock heading back to $80 in the process.

Me? I'm not so sure...

Here's the Smart Way to Play Nikola's Troubles

I can't speak, one way or another, to the claims and allegations in the Hindenburg note - that's between Nikola, its investors, the government, and Hindenburg. Still, I think this time around, the short-sellers might walk off with a win.

That's why I'm making this suggestion.

I think General Motors, Nikola's recent partner, is the way to go here. I don't believe a lot of investors and traders have caught on to this yet.

From where I stand, it's very likely GM will end up with a black eye from all of this. Despite its attempt at due diligence, I think GM will have some fallout coming its way, and problems on the near-term horizon.

I'd sell GM on any rally, for sure, and buy bear put spreads on GM stock.

As we've discussed before, you do that by buying one GM put and selling another GM put with the same expiration date, but at a lower strike. Your maximum possible profit equals the distance between the two strikes minus costs.

You close out the position when it hits your profit target or the maximum profit potential, whichever comes first, by selling what you've bought and buying what you've sold.

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