As momentum investors, we’re always of the belief that “Buy Low, Sell High” is not the best way to make a lot of money. The reality is that you should “Buy high, and sell higher.” Momentum, as a financial anomaly, signals that strong stocks get stronger. That their prices get stronger. That a 52-week high from last week becomes a 52-week high this week.
Take Alpha and Omega Semiconductor (NASDAQ:AOSL), a small-cap semiconductor stock that continues to run higher thanks to strong, smooth momentum. As we can see, momentum has run well, with slight pullbacks from overbought conditions from time to time. Then, we see the stock breakout to new heights.
These are the types of stocks that we like to buy high and sell higher. But there’s another side to momentum. The weak also get weaker.
To Catch a Falling Knife
Beyond Meat (NASDAQ:BYND) is a pathetic company. I can’t really put it any other way. If you don’t know much about it, you’re better off. The company sells “fake meat” by the pound and tells you that if you eat a meatless burger that you’re saving the world and being healthy.
The reality is that you’re fooling yourself. The sheer amount of salt and saturated fat. But like any fad, there are always willing investors. The bullish case is just as fake as the product itself.
When this stock initiated its initial public offering (IPO), there was no shortage of articles and hype around the future of the “meatless diet.” The stock opened trading in May 2019 above $66 per share. Today, it’s trading under its IPO level. It’s now off nearly 75% from it’s all-time high of $221 in January.
Despite the absolute crash in this stock, Mark Connelly at Stephens still has a Buy rating and a price target of $190.00. He hasn’t even bothered to revisit that prediction from 10 months ago despite the massive drop in the stock price. That price target is 186% higher than the current 52-week low. I’m confused why this hasn’t been revised. But then again, that’s the nature of the business.
Wall Street is usually pumping up stocks. Analysts are constantly crawling over each other to project an even higher price. The goal is to pound their chest if the stock hits that level. If it never gets there… Well, who was keeping score anyway?
Just How Bad of a Stock is Beyond Meat?
It currently rates a “Moderate Sell” with the majority of active recommendations suggesting that investors should bail out of the stock. The company isn’t close to profitable. According to Gurufocus, its operating margin is NEGATIVE -23.46%. It has a balance sheet that doesn’t appear to be getting better. Its Piotroski F-Score is 2, meaning that it isn’t improving in seven important financial metrics year-over-year.
But here’s the bigger problem. These meatless products are actually unhealthy. They are stocked in saturated fat. It’s very unclear who exactly is going to be buying all of this stuff. Multiple industry reports signal that restaurants and hotels are struggling to sell this “meatless” treat.
Despite all of the success in other healthy product lines like Oatly and the Simply Good Foods Company, Beyond Meat doesn’t appear to be winning a lot of new business. A number of competitors that jumped into the meatless craze like Canada’s Maple Leaf Foods, are revisiting their commitment to this category.
I imagine that this is going to get worse before it gets better. Momentum for this stock is negative. But it is not yet in oversold conditions in the near-term.
With earnings approaching in February, I think there’s a good opportunity to target the Feb. 18 BYND $55 put and sell the $50 put in a vertical put spread. But remember that this stock could experience a short-term cover by short sellers at any moment. Sometimes the best thing to do is just not do anything.
I can’t think of a stock I want to own less. Not only is it still overvalued at the current price, but it’s a reminder that an IPO is just an exit for some rich investor looking to pass the bag to retail investors.
Don’t bottom feed on Beyond Meat. If you’re looking for a better stock to own heading into 2021, I’ll lay out my thesis for a terrific pullback fintech stock on the final day of the year.