Beyond Meat's (NASDAQ:BYND) stock has soared since coming public just a few weeks ago. But the short sellers appear to be piling into the stock based on the cost to borrow the shares to go short. The technical chart suggests that the stock is overbought and is likely to pull back.
I haven't written on this company before, so I'm throwing my hat into the debate. You can now track my success and failure rate from these articles on this Google Spreadsheet I created.
The cost to borrow shares of Beyond Meat has soared to astronomical levels over the past several weeks. According to data from Trade Alert, on June 10, the cost to borrow the stock was 184% on an annualized basis. It means that someone borrowing the stock and holding that position for the full year would pay more than the stock could fall. It would suggest that anyone shorting the stock at its current valuation has an extremely high level of conviction about the stock falling in the future.
One reason why short sellers may be piling into the stock is the company's valuation. As of June 7, the stock has a valuation of around $10 billion and is trading at 32 times its next 12 months sales estimates, based on data from Koyfin. That's an insanely high valuation. For comparison, even Tesla (TSLA) at its peak, never traded at more than 8 times its next 12-month sales estimates. Tesla has been one of the most contentious bull/bear stories over the past five years, where valuation has always been the key sticking point.
But another reason why traders may be betting against the stock is due to the number of shares that will become available after the lock-up period expires. That period will expire 180 days after the date of the prospectus filing on May 3. According to the SEC filing, more than 40 million shares are still waiting to come off lock-up, nearly quadruple the 9.6 million shares that came public as part of the offering. Venture capital firms hold sizable stakes in the company, and they are likely to distribute their shares to the partners of the venture funds following the completion of the lock-up period.
Entities affiliated with Kleiner Perkins hold nearly 13% of the stock or 7.7 million shares, while Obvious Ventures and DNS-BMYT, LLC own approximately 7.5% or 4.4 million shares each. Finally, Cleveland Avenue, LLC owns roughly 2.6 million shares or 4.4% of the shares outstanding. In all, there are nearly 19 million shares of stock that may become available for sales once the lock-up period expires.
The chart shows that the stock is getting tired. The stock has traded as high as $187 on June 10, and that could be marking a reversal is underway. The relative strength index is at an overbought level well above 70, at 84. On June 7, when the stock peaked at around $160, the RSI also hit a high of about 84.
This pattern potentially creates a bearish divergence between the RSI and the stock's price. That's because the RSI has failed to make a new high, despite the price reaching a new high. It could suggest that Beyond's stock is about to reverse and head lower. Should it drop, it is likely to fall to its first significant level of technical support at nearly $100. That also would allow the stock to fill the gap created on June 7, after the company reported results, another bearish indicator.
There are massive risks with my analysis because it would seem the stock is trading more on sentiment at this point. It means that the stock can continue to climb despite its valuation having any logic. Additionally, it isn't clear just how much of the recent is part of a short squeeze. As of May, data from Ycharts show there were about 3.8 million shares shorts, almost roughly 40% of the stock offering.
Beyond's recent rally seems like a classic bubble that may very well be about to pop. The problems with bubbles: One only knows in hindsight.
The focus of Reading the Markets is to find stocks that may rise or fall using fundamental, technical, and options market analysis. Additionally, we search for clues from the broader markets to discover trends and gauge direction.
Michael Kramer relies on his more than 20-year of experience working in the financial industry. 10-years of experience comes as an international and domestic buy-side equity trader at multi-billion long/short investment advisor.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.