Competitors will nibble away at vegan-burger maker Beyond Meat’s market share – and it is absurdly overpriced.
I enjoy nothing more than a good steak, but I know that veganism is the “in” thing. As my colleague Stuart Watkins pointed out last year, up to one in eight of the population now considers themselves vegetarian or vegan. The problem is that most people still want to enjoy the taste of meat, yet most meat substitute products have so far been awful. This has created a gap in the market for a meat substitute that actually tastes acceptable.
Given this tremendous interest, it’s not surprising that the listing of food technology company Beyond Meat (NYSE: BYND) has not only avoided the fate of Uber and Lyft, which both flopped, but has also apparently succeeded beyond the wildest dreams of its promoters.
It listed at $25 a share and reached $67 by the end of the first day’s trading; it hit a peak of $168 earlier this month. It subsequently fell back a little, but it is still at $142. While some analysts talk of a bubble, others predict that it could go even higher.
So are the bulls right? Beyond Meat has certainly come a long way since it was founded in 2009 with the aim of developing a vegan alternative to meat that tasted like the real thing. Six years ago it started selling its first product, a chicken substitute, in Whole Foods, an upmarket American supermarket chain. Today the company is starting to broaden its appeal beyond foodies by producing vegan “junk” food. Its vegan burger is now sold in various restaurant chains, notably TGI Fridays.
Beyond Meat is operating in a crowded sector
Unfortunately for Beyond Meat’s investors, it isn’t the only company moving into this area. Rival food tech firm Impossible Foods has developed its own vegan hamburger, which actually “bleeds” (thanks to haemoglobin derived from soybeans). This has won it a deal with Burger King. At the same time, some of the largest food-processing companies, such as Tyson Foods and Nestlé, are throwing money at their own versions of a meat-free burger. Consultancy AT Kearney predicts that the main challenge to conventional meat will come not from plant-based products, which even their supporters accept still lack the taste of meat,but from lab-grown meat.
There is also the possibility that the enthusiasm for vegan meat could simply be a fad. But even if you believe that “fake meat” is really the future, and Beyond Meat’s success won’t be derailed by competitors or regulators, the valuation should still give you cause for concern. The stocks is on 39 times this year’s expected sales, while it is still not expected to make a profit until next year.
Given that even the most aggressively priced technology companies cost less than ten times sales, this is a ludicrous valuation.
Trading techniques: chasing profit growth
Growth investing, which focuses on finding firms that can grow their sales and profits at above-average rates for extended periods, is an established investment strategy that has done very well over the past decade. However, the difficulty of predicting firms’ future growth and the long-term focus the strategy involves, mean that traditional growth investing is difficult for traders. As a result, they concentrate on short-term events, such as a positive earnings surprise, or use price momentum (the increase in the price of a share) as a proxy for growth.
Another way to incorporate growth into a trading strategy would be to look at the change in earnings per share over the past year. Research by US investor James O’Shaughnessy finds that there is some evidence to back up such an approach, with the top 10% of American shares by annual earnings growth returning 11.88% compared to 11.22% for the overall market between 1964 and 2009. The problem is that the difference is not only relatively slight, but comes with higher annual volatility.
What’s more, this strategy seems to break down completely when it comes to larger firms. Indeed, O’Shaughnessy finds that during the same period, the fastest-growing shares returned an average of 9.1% a year compared with 10.2% for all large stocks. Furthermore, the fastest-growing shares were also much more volatile. Overall, the evidence suggests that a trading strategy based on buying firms with strong earnings growth over the past year is unlikely to lead to significantly higher returns, and will simply increase risk.
How my tips have fared
The last fortnight has not been kind to my long tips. Three of my recommendations have appreciated slightly, with John Laing Group increasing from 380p to 389p, Hays from 153p to 162p and Superdry from 480p to 482p.
Unfortunately, however, these gains have been negated by several declines. JD Sports has fallen from 611p to 592p, Safestore has gone down from 643p to 630p, and Bellway has fallen from 2,825p to 2,697p.
To make matters worse, Kier has plunged from 161p to 114p, triggering the stop-loss at 119p. Counting the latter position, my long tips are making profits of only £167, down from £884.
If my long tips have had a rough time, then at least there’s the consolation that my short tips haven’t done nearly so badly. Weis Markets fell from $36.97 to $35.66, while Pinterest has declined from $27.94 to $26.77. Just Eat has stayed the same, while Zoom Video Communications remains above the level at which you should start shorting it.
The bad news is that Tesla has risen from $213 to $223. Overall, my short tips are making a collective profit of £1,048, which is better than a fortnight ago when they were making a profit of only £884.
The closing of my Kier positions (as well as the closure of Somero a fortnight ago) means that I now have five long tips and four short tips. If Zoom Video Communications and Beyond Meat fall enough to become worth shorting we could end up with more short tips than longs. I’m not going to close any more positions yet. While I suggested taking a long position in John Laing Group, as well as a short position in Weis Markets, more than six months ago, both plays are profitable, so I’m not going to suggest that you close them yet.