Beyond Meat Aces Earnings Report, Stock Falls Hard
It might be a little hard to understand how Beyond Meat could beat earnings and sales estimates by a lot and still see its stock price tank by 10%. It makes sense though.
It often will take quite a while before a newly issued stock starts to show a profit, but Beyond Meat has been far from your typical initial public offering or IPO. The fact that they have already now gone from the red to the black as far as profitability goes is impressive, and does bode well for its future prospects to be sure.
Beyond Meat had a wild run up from its IPO price in late April of $25, starting with it hitting the trading floor at $46, and then going all the way to $239.71 in July. It’s been falling since, but that was to be expected as anytime you get wild momentum to the upside like this, there are bound to be people taking profits.
Some people were hoping that a good quarterly report this time around would help drive the stock back up, but this has never been about fundamentals. If it were, we would have never seen it break $200 or even $100, and may even have had trouble going over $50 if we use the typical sales to price ratios. This is why when it got over $50, analysts were shaking their heads, but their confusion resulted in a misunderstanding of what really drives stock prices.
What happened is that the stock kept going up and people just kept buying it, raising it further, not unlike what people did with Bitcoin and the other cybercurrencies. We were even able to handle a pretty massive amount of short interest, with more than 50% of the stock loaned out, and even now that number still up in that range. This adds a lot of selling pressure to a stock but for a time at least we had enough buying interest with the other half of the float to keep it going and going.
The price went high enough that too many people got tempted to sell, and we reached a tipping point in July where the tide turned and we started moving in the other direction. As the downward momentum picked up, this caused more and more people to take profits, just like the price rising the way that it did caused more and more people to want to jump in.
This is how stocks move normally, to a degree anyway, as traders make their living riding these waves. You see a stock rise, you jump on, it rises, it stops rising, and you sell.
The analysts were right as far as Beyond Meat’s prices not making any sense from an investor perspective, but this stock has been a trader’s stock so far and traders have carried the day, and still do.
If you are only along for the current move, you don’t care at all whether the price is unsustainable in the long term, as you just wait until this becomes the case in the short them and then you leave.
Traders on both the long and short side get in for various lengths of time, although it’s really only the swing traders that are around long enough to ride moves like this. Some swing for longer time periods than others, and some may even be still in on the long side. Short sellers operate the same way, as some may get out when the price rises a modest amount while others may hang on to their positions and try to ride out the move against them in hope that things will turn around.
The Short Sellers Are Getting the Last Laugh Here
Of course, after things do turn, this generates more interest on the short side, although there are limitations to how much of a stock can be shorted even with premiums as high as 150%. People actually paid that much annual interest just to be able to short this stock, which tells you that this is pretty far away from the world of investing indeed.
On the other hand, if you time this right, you can double your money or better, and this stock has lost well over half its value since the top. Paying that much interest to borrow a stock doesn’t usually make much sense, but Beyond Meat is not any stock and there are people who are up good money with these short plays if they actually did get in at the right time and still hold these positions.
The 150% is annualized, so that’s only 12% per month, which sounds like a lot to an investor but traders can make quite a bit more than 12% in a good month. With the right stock, and Beyond Meat is certainly that, in 3 months you could have paid 36% in interest but made up to 110%, which works out to a net return of 64% and an annualized return of 256%.
This is the ideal though and there are plenty of these traders who may still be underwater overall, given the cost of the trade and the results so far, but there are also plenty of traders who are up quite a bit from this and going for more.
The big payday with an IPO on the short side comes when the lock-out period ends, where company shareholders can get in on the profit taking fun, and a lot of them count the days until they can cash in. Even though we’ve seen this stock give back over half of its value in the last 3 months, $100 is still 4 times what the people who gave up their shares for the IPO got, and $50 a share would still pay out twice as much now as then.
This is the reason why Beyond Meat still has half its float loaned out to short sellers, and the payday day is finally here. The reaction to Monday’s earnings call gave us a taste of what is to come.
If you are long an IPO that has run up a lot and the lock-up period is coming to an end, regardless of how long you plan on holding it, this is not the time to be long the stock. It will be interesting to see just how far this takes Beyond Meat’s stock when all the dust settles, but when you report fabulous earnings and the stock sells off massively, and you are still long, it is time to buckle up.
Even if you are planning on holding this stock until the day you die and will it to your children, it is simply not wise generally to be in a stock that is tanking and is likely about to tank some more. It’s fine to give a stock some room, but once October hit and we broke below the support established in August, it would not be reasonable to hold it anymore long.
A New Gang of Sellers Are Now on the Doorstep
This was even true regardless of how well you thought that the company would do with its third quarter results, and they certainly achieved numbers that were beyond anyone’s expectations outside the company. This just happened to coincide with the end of the lockout period, and with all that extra supply chomping at the bit to sell as soon as they could, it wasn’t even a fair fight.
Making a profit last quarter also gave us our first actual PE ratio of sorts, and if we annualize this $0.06 of profit per share over a quarter and compare that to the $105 that it was trading at on Monday, this produces a heady PE ratio of 437. It’s not that this should matter, especially given that a stock with negative earnings has a PE ratio that is infinitely high, this can serve as a sort of wakeup call to those who pay attention to such things.
That hasn’t really factored into things though and haven’t even cared much about numbers like 15 times forward sales, which would be a reasonable number if this were profits and not sales, but is a whole dimension higher when we use sales instead.
The analysts need to use something though so they use price-to-sales by default. They have told us this is way too high, but the traders don’t care at all about this, and this has once again been a trader’s stock so far.
The results are in and the fact that Beyond Meat did make a profit at all amazed the street, as did their exceeding revenue expectations by $10 million, representing an increase of 12%. Full year guidance also took a leap forward, which has been raised from $210 million in Q1, to $240 million in Q2, to $270 million in Q3. Business-wise, things have been simply great, and are expected to continue to improve.
After all this was shared with the world, Beyond Meat stock dropped over 10% in after-hours trading. We usually see at least some negatives and usually lots of them when the price of a stock drops this much after hours after a quarterly announcement, but this situation is quite different.
There’s only one thing that could cause this and that is a supply shock, from the lock-in period just expiring, and that should worry people. The time to get out of the long side wasn’t Tuesday, it was quite some time ago, and those who took their chances that somehow a good report would make up for all this extra supply weren’t really considering the situation very well.
Sometimes, when a stock gives back as much as Beyond Meat has, we’d be keeping our eye out for the value players, but the smart money is much more likely to take a wait and see attitude and look to buy this much lower than it even is. That actually makes sense, although this is little consolation for those who hope that we’ll get back over $150 or perhaps even over $120 anytime soon.
We might not even see $100 again for a long time, given that it is now trading below $95 and the market just had the pants scared off them. This does look like a fairly risky short entry here, if you can even borrow it now at any price, due to getting in so late in the game, and with all the short interest already out there, but those already short may very well be in for even more of a treat over the next little while.
It really wouldn’t be wise for traders looking to go long to jump in here, as we really need some positive momentum to telegraph a rebound, and we have the opposite right now.
The analysts will probably claim that they were right all along, but none of this has been for the reasons they believed, the stock being overvalued long term, as this has all been about the short term, and the short-term ride is far from over.
Editor, MarketReview.com
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