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Mullen Automotive (NASDAQ:MULN) is another in the long string of electric vehicle (EV) start-ups with big plans. MULN stock originally spiked on these possibilities, but have fallen sharply in recent months.
The company plans to launch a sports utility vehicle, named Five, within the next couple of years. It also is in the cargo van business, it plans to manufacture next-generation batteries, and it also has an online automobile marketplace. With all this excitement, why is MULN stock selling for just a dollar per share?
The issue is that Mullen hasn’t proven much of this potential yet. More specifically, Mullen has not yet generated meaningful revenues. Needless to say, it is running large operating losses. And there are skeptics who question whether Mullen will ever be able to bring his plans to fruition.
|MULN||Mullen Automotive, Inc.||$1.25|
Little Evidence That Mullen Can Deliver
In my most recent coverage of Mullen Automotive stock, I warned that there simply wasn’t enough evidence to make a solid investment decision about the company. Mullen apparently lacks the financial capacity to deliver on all its proposed lines of business. Additionally, in the wake of so many other EV companies which have flamed out in spectacular fashion, investors should do extra due diligence when investigating a pre-revenue stage EV company.
These concerns were further amplified by a hard-hitting short seller report from Hindenburg Research. Hindenburg warned that there wasn’t much going on at Mullen’s manufacturing facility in Alabama. It also cautioned that some of Mullen’s technology appears to be simply repurposed materials from Chinese vendors.
A New Bullish Catalyst Emerges
While the fundamental outlook for MULN stock remains cloudy at best, there is a short-term positive. The good news is that Mullen Automotive will be joining the Russell indexes later this month. On June 27, to be specific, MULN stock will be added to the Russell 2000 and Russell 3000 stock indexes. In doing so, it will become eligible for inclusion in exchange-traded funds (ETFs) and other passive investment vehicles based off these benchmarks.
The Russell 2000 is of particular importance since it is the preeminent benchmark of American small-cap stocks. Tons of institutional money owns Russell 2000 products directly, or funds which closely mirror that index. One fund alone, the iShares Russell 2000 ETF (NYSEARCA:IWM), has more than $50 billion in assets under management. Come the end of June, a small portion of IWM and various other Russell ETFs will start allocating capital to MULN stock.
Traders have been buying Mullen shares ahead of the index addition. The idea is to sell them into the rally that may come once the IWM and other ETFs start buying. This is a sensible strategy, though the risk comes if too many people have the same idea at the same time.
MULN Stock Verdict
It makes sense why short-term traders remain interested in Mullen ahead of the Russell addition. Quite literally, passive investors will be forced to buy MULN stock, regardless of the current price, once it joins the index. Smart traders often buy stocks before they enter an index to profit from this tendency.
However, don’t plan on sticking with Mullen beyond that point as the balance sheet remains a major concern. As our Thomas Niel warned:
Any way you slice it, a company with $65.2 million in cash that’s burning through $36.6 million of it (or more) per quarter is going to need more money. Assuming it has to continue raising this money through convertible financing, as it’s done before, it’ll do so on terms highly unfavorable to anyone holding MULN stock.
Niel is right to caution about the potential for more share dilution. Indeed, the company just filed for another dilutive warrant offering on June 10. Don’t be surprised if this share overhang starts to hit the market in a big way once the current index catalyst passes.
Thus, for shrewd fast-moving traders, the play might be to buy Mullen stock with the intention of selling by the end of June. That said, there’s nothing wrong with avoiding the stock altogether until its actual fundamentals improve considerably.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.