Stocks to buy

There Could Be High Rewards for High-Risk HUDI Stock

Based in Wenzhou China, Huadi International (NASDAQ:HUDI) is a manufacturer of steel pipes and tubes. However, it was Huadi’s announced plans to move into a new industry (more below) that sent HUDI stock on an incredible, but brief, run earlier this month.

Admittedly, the market went overboard in its reaction to this news, by sending the stock from the mid-$20s to prices nearing $200 per share. Since then, though, Huadi has pulled back from such lofty price levels. In fact, shares have not only coughed up these gains; the stock has hit new lows as well.

Given that there haven’t been any major changes to Huadi’s newly-emerged catalyst, this may mean a great opportunity has opened up if you can stomach the risk. While I wouldn’t count on a quick rebound, even a partial recovery would mean outsized returns for investors buying at present price levels.

HUDI Huadi International $7.08

Why HUDI Stock Surged and Sank

On Nov. 3, Huadi International went from obscure China steel products stock to much-talked-about “hot stock,” following a press release announcing its plans to enter the clean energy technology space. The press release detailed how the company was in talks with officials from China’s Sichuan province, regarding Huadi building an anode materials production facility there.

Used in the production of electric vehicle batteries, it’s an understatement to say diversifying into anode material manufacturing offers tremendous growth potential for this company, and for HUDI stock. That may explain why a speculative frenzy emerged immediately following the press release drop.

But almost as quickly as it started, the HUDI rally morphed into a severe sell-off. Between the mania for this stock fading, and the company’s announced plans to raise capital through a $25 million direct offering, Huadi plummeted to just under $20 per share at the market open on Nov. 7 and has since slid down to the high single-digits.

This is an unfortunate outcome for investors who held it through the surge. Or worse, bought it near the top. For new investors, though, the stock may now be at a favorable entry point.

What Could Drive a Rebound

While it’s far from certain that HUDI stock has found a floor at present price levels, if you decide to buy today, the potential rewards may far outweigh the risk. For starters, following HUDI’s drop to around $8 per share, it may now be at a reasonable valuation.

On a trailing twelve-month basis, the stock may look expensive, at around 53.7 times earnings. However, economic and pandemic-related headwinds could soon start to clear up.

In turn, the operating performance of Huadi’s steel products business could materially improve. At current prices, the impact of the aforementioned shareholder dilution may be more than accounted-for as well.

Alongside this, the company has a strong chance of experiencing a “liftoff moment” for its diversification efforts. EV proliferation is accelerating at a much faster pace in China than it is in the United States. This points to continued rising demand for EV battery components such as anode materials.

A return to its all-time high ($192.88 per share) may be a tall order, but these two catalysts are more than enough to, in time, send HUDI back up to price levels many times above what it trades for today.

The Verdict

There could be high rewards down the road for investors buying Huadi today. Still, don’t ignore the high-risk that comes along with it. Although there’s a lot of promise with its new anode materials endeavor, there’s no guarantee this business will take off as expected.

A turnaround for the steel business alone could move the needle, yet this is more of a secondary catalyst for the stock. Likely to remain very volatile, the risk-averse should tread carefully, or skip out on it altogether.

That said, if you are an investor with a high risk appetite, searching for promising speculative growth plays, this is definitely one worth considering. At the very least, add it to your watchlist.

In hindsight, entering a small speculative position in HUDI stock, whether now or on further weakness, could prove in hindsight to be a profitable move.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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