Here’s Why Worm Capital is Avoiding Nikola Corp (NKLA) Stock

Worm Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. Year-to-date through Q3 2020, the long/short equity strategy fund returned 171.64%, and the long-only strategy fund returned 125.43%, net of fees. Meanwhile, the S&P 500 Index returned 5.58% over the same period. You should check out Worm Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners this year.

In the said letter, Worm Capital highlighted a few stocks and Nikola Corp (NASDAQ:NKLA) is one of them. Nikola Corp (NASDAQ:NKLA) designs and manufactures automobiles. Year-to-date, Nikola Corp (NASDAQ:NKLA) stock gained 133.6% and on October 14th it had a closing price of $24.11. Here is what Worm Capital said:

“While picking and riding winners are key to success in long-term investing, another less-discussed element is avoiding the landmines. And there are many of them, especially in this market environment.

I’ll give you an example of a landmine we recently avoided. Last fall, a relatively unknown company announced a major battery breakthrough that, they claimed, would compete with Tesla’s Semi all-electric truck. We began digging into the company, its founder, and the supposed technological breakthroughs. What we found was bizarre: Despite a charismatic CEO who claimed major advancements in cell chemistry that would improve vehicle range and efficiency, we couldn’t independently verify the company’s claims. Needless to say, after much digging, we passed on the investment.

That company, Nikola Motors, went public this summer. While retail and even institutional investors rushed into the stock, Wall Street analysts championed the company. It appeared, to us at least, that little diligence had been completed on this company. Cowen analyst Jeffrey Osborne, for instance, rated the company a “Buy.” His analysis? “We see Nikola as an intriguing investment opportunity,” he wrote. In a two-month period, its shares surged roughly 450%.

By September, however, the Nikola story appeared to be falling apart. Hindenburg Research, a short-seller, published a damning report, alleging fraud, titled “Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America.” The report claimed Nikola had inflated its technological prowess, and over the next several days, the value of the stock began to plummet. [Nikola, now being investigative by the DOJ and SEC, denied Hindenburg’s claims.]

Though we chose not to short this company—as a rule, we tend to avoid shorting momentum stocks—it’s a reminder that long-term investment requires patience, conviction—and diligence. I bring up this anecdote to remind investors that, equally important to picking winners, is avoiding the losers. In this disruption “super cycle,” I anticipate there will be many imitators riding the coattails of industry disruptors. My philosophy is to only own the companies with the absolute best value proposition winning customers on the ground-level. This process, in my opinion, provides a significant margin of safety to sidestep the landmines.”

In Q2 2020, the number of bullish hedge fund positions on Nikola Corp (NASDAQ:NKLA) stock increased by about 123% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Nikola’s growth potential. Our calculations showed that Nikola Corp (NASDAQ:NKLA) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.