Drone Redux Opportunity?

Last fall I started doing videos on Ehang (EH), a then-obscure maker of "air mobility drones" - remote-controlled air taxis, if you will, developed by a Nasdaq-traded Chinese company.

Plenty of companies make small model-sized drones for various uses as toys, airborne cameras, and whatnot.

Very few make drones large enough to carry a person. Of those that do, most are either in the planning/development stage or in some form of early unmanned testing.

Boeing (BA) is reportedly working on one such vehicle. So are a number of SPACs and startups with names like Archer (ACIC), Wisk and others.

Ehang, on the other hand, regularly publishes YouTube videos of its "air taxi" drones flying with 1 or 2 people aboard (in the major Chinese cities, but also in front of news cameras in Raleigh, North Carolina, as well as Europe and elsewhere).

That's what impressed me most about the company as a trading idea. Its products aren't on a drafting table - they're up and flying already.

As the chart below notes, it turned out to be a fantastic profit opportunity.

We have the makings of a second such opportunity now.

Every stock trade or investment carries risk. We must always be aware of that opportunity for losing money - or making it - when pursuing trades in the stock market.

In the first trade, I noted the setup in this video in October when the stock was trading at roughly $9 a share.

As you can tell from the chart above, the stock moved slowly higher in the following weeks, then rocketed higher like a July 4th firework in the opening days of the new year.

By the middle of January, my trade was up more than 700%!

At that point, I didn't want to push my luck further and - with the stock now above $70 a share, said it was a good spot to sell the stock.

Stocks of this type usually pull back at some point. The parabolic nature of the move - unsustainably so, quite often - also figured into my decision to taking those windfall profits.

Yes, I sold early as it turns out. But one can never time the tops of these kinds of things. A 700% gain in just a handful of months doesn't come around very often, so when it comes, better to take the profit when its staring you in the face rather than risk it being frittered away (which is exactly what happened to the shares between February and now).

Usually if you're patient, a stock will give you a second chance.

That's what I'm looking at today as Ehang's share price - down nearly 80% from its early 2021 highs -moves back up nearly to its 200 day moving average.

My bet is that the stock has likely bottomed.

I would be buying the stock at the market price of around $26 on the expectation that the stock will work its way higher through the summer.

I would look to sell if the shares decline to roughly $19.50 a share.

That way, I'm limiting my potential loss to roughly 25%. And while I don't think this trade is going to net me a 700% gain in 3 months like my first effort, I think Ehang could at least double or possibly triple.

The idea, as always, is to keep losses small while letting winners run.

The other thing I continue to like about Ehang is its fundamental picture, such as it is.

Basically, this is a company that could - could - go from posting a loss of -$0.07 a share for 2020 to generating a profit of $0.24 a share by the end of its 2021 fiscal year (and, if everything went right, see those profits rise to as much as $0.61 a share in 2022).

Mind you, those are projections produced by an analyst sitting in his or her office with a spreadsheet. Things often turn out differently in the real world.

On the other hand, at the current price, expectations on the part of investors are very low. All the dreams and "meme investing" scuttlebutt about getting rich on the stock as fleets of Ehang air taxis filled the skies over Beijing, Shanghai and Hong Kong - have long since faded away.

Yet Ehang continues to innovate. The company recently took the wraps off its VT-30, a passenger-drone designed for longer duration flights.

The craft reportedly has a range of 186 miles.

That's far more than Ehang's helicopter-like EH-184 flagship drone (its initial testing flights were in 2016), designed for brief flights of 10-15 minutes so corporate executives can fly over gridlocked surface streets and quickly get from, say, the north side of downtown Beijing to the south side, in just a few minutes' time.

One last thing about Ehang is that the company has been a target for shortsellers. Early this year, with the stock at alltime highs of $120, one such firm claimed the company was “an elaborate stock promotion, built on largely fabricated revenues based on sham sales contracts.”

The company denied the report, but with the stock having already made a huge rise from October to February, plenty of investors were prone to taking profits anyway. The shortseller report was what helped slam the stock sharply lower (and made me happy to have exited the position for big profits when I did).

If the stock rises from the current price, it could come under attack from shortseller reports yet again. That's a risk that all traders have to assume with any stock.

Jeff