This week, a report came out that electric car maker Nikola might have misled investors. This question will almost certainly keep lawyers busy for years.

The research report was issued on behalf of investors who hold a short position in the stock. Short trades make money when the price of a stock falls, so questioning whether or not the company’s product works could lead to profits for short positions.

If you’re not familiar with the issue, one big question revolves around a video called “Nikola One Electric Semi Truck in Motion.” That video shows a truck moving along a desert road.

Source: YouTube

The report notes that the video “made it seem that its Nikola One semi-truck was traveling under its own power at a high rate of speed. Angles in the video were edited to make it appear as though the semi was moving on a roadway that was flat, or even uphill.”

The company “acknowledged that its vehicle was not functioning under its own power, and instead, was apparently simply showcasing the power of gravity. It claimed that using the term “in motion” dispelled the deceptive nature of the video.”

Investors seemed to be unaware that the video was about gravity because they bought the stock, seeming to believe the truck was a game changer in the electric vehicle market.

Shares of Nikola have been rising since it began trading earlier this year. You can see the incredible rise in the chart below.

The Simple Trick That Should Help You Steer Clear Of Stocks Like This…

There’s no doubt that a lot of growth-minded investors were seduced by stories like NKLA’s. That’s what happens when you have a bull market fueled by unprecedented liquidity provided by the Federal Reserve.

NKLA used what’s known as a SPAC (special purpose acquisition company) to begin trading rather than a traditional initial public offering (IPO). SPACs allow companies to go public with less scrutiny and, in this case, it’s possible that’s exactly what NKLA was counting on.

Now, if you look at the bottom of the chart, you can see my Income Trader Volatility (ITV) indicator. It told me the stock wasn’t attractive. But here’s the thing…

I would have told you the same thing months ago… before the research report or the initial doubt or even the YouTube video.

Everything I needed to know was already widely available to the public in the Nikola’s income statement.

Notice anything? That’s right, there’s absolutely nothing in the sales line of the income statement.

You see, I always look at a company’s sales before I recommend a stock. I know that sounds old fashioned in the current market, but maybe I’m just a bit old fashioned.

The Takeaway

Look, there will always be time to profit from great companies with a compelling growth story. More often than not, it’s going to come after the product is available. If Nikola’s trucks are going to dominate the market, we can trade the stock after the income statement shows that sales are growing. It’s that simple.

Yet at its peak, investors valued a company with no revenue and an unproven product at more than $32 billion. If you still had any question whether the stock market is all about speculation, well, there’s your answer.

This recent example of excessive speculation is a strong indicator that we should be cautious. It’s hard to tell when a rally is a house made of straw – until it’s too late.

It’s also why you should learn about my colleague Jim Fink’s market-beating strategy.

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