When your stock is up 273% from its opening price in a little over a month, in a month where stocks did terribly overall, it takes more than an analyst downgrade to end the party.
When people looked at the IPO calendar for 2019, Beyond Meat just didn’t get the attention or focus that it probably deserved, especially when put up against much bigger and better-known companies such as Levi Strauss, Uber, Lyft, and Pinterest.
Beyond Meat has been almost beyond belief in how this starter stock has taken off though, and isn’t just the star of this show, it has outshone its competitors on a grand scale.
It’s not that Beyond Meat is making money yet, and often times companies that release IPOs do so at a fairly early age where revenue is growing but we only have a hope of profits. This stock certainly has the elements that we look for in a great IPO, and profitability isn’t really something that is required at this stage, although the prospects of this changing certainly is.
We generally look at a company’s recent history of its earnings, or its expected earnings over the short term, and use these numbers to figure out where the stock may be going. We also tend to compare stocks this way and come up with reasons why certain stocks should be going up and certain ones perhaps will go down. While these things don’t really tend to be very reliable, analysts still cling to these ideas no matter how many times they are proven wrong or how much data disproves the validity of their assumed correlations.
When we try to do this with an IPO though, where these calculations and ideas have the least merit, this view can really fall on its face. No matter though, they will insist that they are right and when the market does not act in the way they predict, the market is somehow wrong.
We’re getting to really see this in spades with Beyond Meat’s IPO, and it represents a good example indeed of how we need to avoid using distorted thinking to predict future stock prices.
An even better example of all would actually be with cybercurrencies such as Bitcoin and others, all of which do not have earnings at all, or any intrinsic value at all. The value of cybercurrencies is exactly what people are willing to pay for them at any given point in time, no more and no less.
There is therefore no real floor or ceiling on these purely digital assets, and their price is only restricted by what people are willing to pay for them. Those who base their decisions on fundamental analysis, whatever they determine a stock’s value to be based upon these things, find digital assets completely outside their model and they are left with little more to say other than the price moving up not making sense and this all being vacuous.
We Need to Stick to What Really Counts
In spite of this confusion, they still will steadfastly assert that stocks just don’t work this way because their price is indeed based upon their interpretations of valuation, and don’t really get that stocks actually behave much more like vacuous digital assets than their concept of how stocks should move, their value calculations essentially.
It doesn’t matter whether or not their views have been shown to be correct or even if they make sense at all, but the fundamentals that stocks have that cybercurrencies lack at least can affect investors’ perceptions. A good example of this at work is this week’s downgrade of Beyond Meat by Bernstein, which was said to be the last of the enthusiastic bulls. Even they have now given in to the idea that the movement of the stock already represents the best-case scenario for the company’s projected earnings for the next 6 years, if not longer, if that was what really mattered.
This did cause the stock to take a real haircut on Tuesday, or it at least stirred up enough concern for the market to price it a lot lower, to the tune of a one-day loss of 23%. It would be correct to say that this scared some investors this much, even though this stock has been so hot that even a 23% loss still has them way up.
When a stock goes up by 70% in just two trading days, the previous two in this case, giving up that much is nowhere near as big of a deal as it would be with a mature stock which might take a long time to get that back. In comparison, the overall market lost only 20% in the last quarter of last year and took a great deal of time to lose it and then to gain it back.
The question we need to be asking ourselves is why it matters whether a company has its first 6 years of growth priced in to its stock in its first 5 weeks. The only real answer here is that this might be a restraint on its price if the market allows it to be.
There are theoretical limitations to how much a stock can go up, which would actually be what would happen if everyone sold all their investments and put this and all their other money into Beyond Meat. This would end up seeing its price per share rise to much that it would be well beyond the imagination.
Short of that, the actual limit is decided on just how much people value a stock, and this is not so much a matter of how much inflow you have into the stock, what we could call the quantitative side of demand, as it’s more about the qualitative side of demand, the actual movement of the perception of future value.
If Beyond Meat went up by 10 times more over the next year, it’s not that 10 times more money was invested in it, it would be because their perceived future value grew by 10 times. This is what moves stock prices and is in fact the sole thing that moves them. Everything else influences stock prices by how they add or take away from these perceptions.
People bought Bitcoins at $15,000 per coin for instance because they perceived its value even higher than this. Sure enough, it did rise from there, quite a bit actually, until these perceptions turned negative and the concern then turned to just how far it would now fall.
It Really Is All About Beliefs
This is a very important lesson, and one we need to grasp properly, and saying things like they have priced in growth for the next 6 years or however long reveals not probability but ignorance.
This view ends up treating common stocks like they are preferred stocks, where price is a constant and dividends are the only focus, how much and how likely we are to get paid from that income stream. With stocks, there is another, completely different income stream, what we make from the difference we paid for a stock and what we sell it for. These are independent variables essentially, and while there usually is some interplay between them with stocks, it’s pretty variable and entirely contingent.
Given that people do pay attention to this, the belief can influence the reality, but only because the reality is wholly dependent upon beliefs. If we collectively believe that Beyond Meat can make it to $1000, it will happen, because the belief makes it so.
If we are focusing on what is really going on, this will have us looking at the beliefs themselves and not seek to wrongly constrain them with our own beliefs. When the market’s beliefs and our own are at odds, we are wrong 100% of the time, and they very often do collide.
An IPO such as Beyond Meat makes this all much more transparent than with a mature stock, and the main reason is that investor enthusiasm can be heightened so much more.
Beyond Meat actually has a lot going for it as far as the prospects of their stock price, starting with the fact that they are new and haven’t settled into a range yet. We might want to set limits on its range like analysts like to do, but for this to happen, we have to be all exclusively focused on the same things that they are, the multiples of future earnings and the like.
Earnings only affect a stock’s price contingently, to the degree that this is seen to be an influencer, and only to the degree that it is seen to be. This is not something that many people do not understand very well, but with a stock like this, it’s even more important to get it.
Beyond Meat is a leader in an industry that is seen as having a whole lot of potential down the road, the meatless meat market we could call it, and this has people excited. It’s also eco- friendly and this makes a lot of people happy as well, and their happiness does translate into the stock price.
An IPO that is shooting up like this stock is also creates a lot of excitement, perhaps like nothing else, and this has contributed a lot to its rise by creating a lot of forward momentum. There’s also a lot of short interest in it, and over half of the float of this stock is lent out. Even a ridiculous cost of over 130% to borrow it isn’t scaring the bears away, nor is all the blood they continue to spill by staying short a stock that is rocketing the other way.
Beyond Meat should actually be the worst nightmare for short sellers, and this effect is self-perpetuating to a degree, where we are seeing what we call a short squeeze. As the stock climbs higher and higher, short sellers bail, or get margin calls when they lose all their money. This means they buy the stock to close out their positions, which is famous for putting up the price of a stock in itself.
Beyond Meat’s initial rise will cease exactly at the point where people don’t believe it will be going higher, and this belief in going higher doesn’t necessarily mean this month or this year, it can mean going up nicely even a decade or two from now.
Have we seen the short-term peak on Monday, prior to the 23% pullback, or can it go even higher? Wednesday, the day after the drop, saw it gain back $14 of the $42 it lost the day before, so we are already seeing signs of a recovery from these more bearish concerns.
This is not a stock we should be even thinking of shorting right now, not now or at any time in the stock’s short history, and we may even want to observe a moment of silence for our brothers and sisters who have got caught on the wrong side of this craze.
Buying the dip here, on the other hand, was a good move so far for those who did it, and we should not be surprised that we’re heading back up after we let these and similar concerns shake us up a little. The train may have hit a bump and we may have gotten jarred around in our seats a little, but this train has a lot behind it and won’t leave the tracks from just a little bump.
Its sheer speed does cause these bumps to have this train jolted more, but as long as it maintains enough speed, it will just bounce over these and keep going.
We probably won’t be seeing too many 70% gains in two days though, as moves of this magnitude simply cannot be sustained, but there’s no real reason why Beyond Meat cannot go beyond Monday’s high and perhaps even well beyond that this year. Setting a modest price target or any price target actually at this point with this stock just doesn’t make much sense, as the mob that is driving this will disperse when they are ready and only when they are ready.
Beyond Meat may be as close to the perfect short-term IPO as we will ever see. Perhaps the most important part of appreciating its potential and its probabilities is to understand that people aren’t continuing to pay more for this because they are looking at what the company make one day. They are instead influenced by what they may put in their pockets sooner, from the price going up further, just like they did with Bitcoin in fact. That can drive the price up like nothing else.