Possible Short Squeeze Candidate Canoo (GOEV) Swings Higher

• Electric vehicle maker Canoo jumped up over 14% on Tuesday on a possible short squeeze.
• GOEV stock was also the subject of unusual options activity with upside implications.
• Despite the impressive single-day return, investors must focus on the fundamentals.

While market analysts often love to tout that electric vehicles are the future, the enthusiasm for the sector – which has grown tremendously in recent years – is down significantly in 2022. Case in point is upstart Canoo (GOEV), an innovative firm that’s perhaps best known for its skateboard platform, enabling rapid-fire chassis adjustments to accommodate shifts in consumer behaviors.

On the surface, GOEV stock seems like a worthy candidate for speculation. Unfortunately, on a year-to-date basis, Canoo shares have been downright ugly, dropping over 73% through the close of the July 5 session. However, on the same day, GOEV managed to deliver a return of over 14%. While it doesn’t make up for the 73% loss, it appears sentiment is pivoting.

Although Canoo generated headlines for getting the nod from NASA to transport astronauts to the launchpad, the primary catalyst for the dramatic move higher in GOEV stock is likely speculation on a short squeeze.

In fact, Canoo features significant bearish coverage, with 24% of its float held short while the short ratio – or the days necessary to cover the short position – is slightly over 16. Put another way, bearish traders are vulnerable to getting blown out of their positions if GOEV stock swings unexpectedly higher as share volume is not readily robust like other publicly traded companies.

GOEV Stock Lights Up the Options Market

As if the short metrics were not enticing enough for contrarian investors, GOEV stock lit up the derivatives market on Tuesday. Call options with a $2 strike price and an expiration date of July 8, 2022 – that would be this coming Friday – pinged Barchart.com’s radar for unusual options activity. Volume hit 5,480 contracts against an open interest reading of 107.

When the closing bell rang out on July 5, GOEV stock closed at $2.15, meaning that the aforementioned calls are in the money by a margin of 7.5%. However, what is peculiar about this particular trade is the wide bid-ask spread. As represented by the midpoint price (20 cents), the $2 calls have a spread of 15%, which seems rather high for what appears to be a surefire near-term bet.

Generally speaking, wide spreads are warning signs because they indicate a lack of liquidity. Further, the market maker facilitating the trade might not have the confidence of properly adjudicating the transaction. In contrast, narrower spreads indicate greater confidence since market makers compete with others to draw in demand from traders.

Stated differently, while supporters of GOEV stock might consider the near-expiry options play as a slam dunk, market makers are being careful, essentially protecting themselves with wider spreads in case circumstances go awry.

That is about as clear of a warning sign to consider the fundamentals for Canoo before proceeding.

Risk Factors to Note

Although GOEV stock represented one of the most celebrated investments in late 2020 to early 2021, the underlying narrative quickly started to unravel. Further, negative momentum picked up steam over the trailing half-year period, most conspicuously with three top executives leaving the firm. Later, in its first quarter of 2022 earnings report, Canoo reported a net loss of $125 million.

If that wasn’t enough, it also had to issue a warning that it could meet its financial obligations 12 months from the point of the earnings disclosure. Plus, you usually don’t lose over 73% of market value over a six-month period if investors had confidence in the underlying business strategy.

To be fair, Canoo CEO Tony Aquila notes that technology-driven firms don’t often keep cash based on a 12-month cycle. Instead, such organizations hit performance milestones and then raise capital based on those achievements. As well, Canoo features substantial innovations, such as its steer-by-wire system.

Nevertheless, the competition in the EV sector has become saturated. Over time, consolidation may be the name of the game, which may or may not benefit GOEV stock. More importantly, with inflation taking a bite out of household’s real earnings, Canoo’s focus on mid-income customers may bring incredible challenges.

Short Squeezes Are Not Guaranteed

On a final note, investors should realize that short squeezes are not guaranteed to materialize simply because metrics like short percentage of float or short ratio seemingly favor the contrarian trade. What excessively high short interest indicates is that most investors believe the underlying security will fall in value, not rise.

Ultimately, though, the fundamentals tell the true tale. With Canoo struggling to make money and hold onto its key executives, a possible incoming recession may impose overwhelming pressure on GOEV stock. Therefore, prospective participants should tread very carefully.

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