Bubbles and BYND

I recently published my article, Beyond Meat (BYND), at a time when the company was trading at $141.39 per share and a market cap valuation of $8.12 billion.  Today, the stock has climbed to a current price of $178 and at one point broke the $200 price mark. This gives BYND are current market cap of $10.67 billion.  Before any further arguments for a potential short position in BYND, please read the two passages I’ve provided below from Irrational Exuberance by Robert J. Shiller.  

Examples of “Obvious” Mispricing (Pg 199-200)

Despite the general authority of the efficient markets theory in popular thinking, one often hears examples that seem to offer flagrant evidence against it.  There are in fact many examples of financial prices that, it seems, cannot possibly be right. They are regularly reported in the media. In the 1990s stock market boom, many of these examples were Internet Stocks; judging from their prices, the public appears to have held an exaggerated view of then potential.  

For example, consider eToys, a firm established in 1997, to sell toys over the Internet.  Shortly after its initial public offering in 1999, eToys’ stock value was $8 billion, exceeding the $6billion value of the long established “brick and mortar” retailer Toys “R” Us.  And yet, in fiscal 1998, eToys’s sales were $30 million, while the sales of Toys “R” Us were $11.2 billion, almost 400 times larger. And eToys’ profits were a negative $28.6 million, while the profits of Toys “R” Us were a positive $376 million.  In fact, Toys “R” Us, like other established toy retailers. Had already created its own website. Despite some initial difficulties getting its site launched, Toys “R” Us was seen by many as having a longer-run advantage over eToys in that dissatisfied purchases of toys on the internet could go to its numerous retail outlets for returns or advice.  In addition, customers who were already shopping at one of those outlets would naturally gravitate to the toys “R” Us website when making online purchases.

Despite these publicly aired doubts, investors loved eToys.  But it didn’t take long for the doubters to be proven right eToys.com filed for bankruptcy and was delisted from NASDAQ, in march 2001.  The final step was the May 2001 sale of the eToys.com web address to KB Toys, which in turn filed for bankruptcy in January 2004.

The valuation the market placed on stocks such as eToys at the peak of the market in 1999 and 2000 appears absurd to many observers, and yet the influence of these observers om ,market prices does not seem to correct the mispricing.  What could they do that would have the effect of correcting it? Those who doubt the value of these stocks could try to sell them short, and some do, but their willingness to dod so is limited, partly since there is a possibility that the stock will be bid up further by enthusiastic investors.  We will see other reasons later. Absurd prices sometimes last a long time.

Short Sales Constraints and the Persistence of Obvious Mispricing (Pg 200-201)

There is reason to think that obvious mispricing really ought to occur, even in a world with huge quantities of smart money searching for mispriced assets.  That reasons there are often obstacles to short sales to borrowing the assets and selling them, thereby in effect holding negative quantities of the assets. Edward Miller, an eccentric professor from the University of New ORleans who has written proactive papers on a wide range of academic disciplines, first pointed this out in a 1977 article in the Journal of Finance that seemed to take efficient market theorists by surprise.  

Miller’s argument was quite simple: suppose a particular stock, or a particular tulip, or whatever, comes into great demand by a small group of zealots, who bid eagerly against one another to buy as much investment of this as they can.  Efficient markets theory does not say that there are no zealots, which would be an absurd claim; it says only that somehow the smart money ultimately sets market prices. But if these zealots have really lost their sense, and if they buy so aggressively that they end up being the only people hiding these assets, who is to say that these assets won’t become widely overpriced.  The smart money, who are not crazy, would like to short the overpriced assets to profit from the eventual fall in price, but if they cannot find any of the assets to borrow, the only way they can participate is by buying. As a result, they must just sit on the sidelines. The market with short-sales constraints, can be wildly overpriced, and the smart money knows it, but there is no way for the smart money to use that knowledge.  

Short-sales constraints are very real.  Some countries’ governments do not allow short-sales at all.  Even in countries where short sales are allowed, the institutions supporting them may not work very well.  Part of the reason is that even in these countries, there is a widespread antipathy to short sellers. Short sellers are blamed for all sorts of bad things.  The New York Stock Exchange used to have an orderly market for the borrowing and lending of shares, the “loan crowd” on the floor of the exchange, bu shut this market down some years after the Stock Market crash of 1929 – a move that was widely blamed on short sellers.  Short sellers are commonly targeted as “boogeymen” for fluctuating or falling equity prices, a position echoed by regulators – short sales of financial stocks where temporarily banned in the United States and Europe after the market crash of 2008 in an attempt to stem market declines.  

The difficulty of making short sales has played a real role in the mispricing of securities.  A good example in the mispricing of the shares sold during the 3Com sale of Palm near the peak of the stock market in March 2000.  In this initial public offering, 3 Com sold 5% of its subsidiary Palm, a maker of personal digital assistants to the general public, and announced at the same time that the rest of Palm would be sold later.  This initial 5% of Palm went for such a high price in the market that, if one assumed that the other 95% of the Palm shares were worth as much, these shares exceed the market value of their owner, 3Com. This is obvious mispricing if there ever was such a thing.  But the interest cost of borrowing Palm shares grew to extraordinary levels, 35% per year by July 2000, high enough to make it impractical for smart money to profit from knowledge of this mispricing by shorting Palm and buying 3Com. The Palm example is extreme, but it illustrates the effects of restriction on short sales.  There are many barriers to short selling, not just the explicit interest cost; some of these barriers are bureautic, psychological and social.

With regards to BYND, one can relate a little to the story of eToys.com and Palm.  First off, BYND is encroaching on a $14 billion market cap, it almost broke through this level when it briefly surpassed $200 at the opening bell.  The significance of the potential $14 billion market cap, is that the company with negative total profits would have a current valuation roughly one-half that of rival Tyson Foods (TSN).  Keep in mind, TSN trades at a current total market cap valuation of $28.3 billion and has gross profit (ttm) of $5.23 billion compared to BYND’s market cap of $10.67 billion and gross profit (ttm) of $17.57 million.  One may ask what is the significance of this? Well recall that BYND pitched itself as a potential competitor within the entire meat industry.  Hence, Tyson Foods would be their biggest competitor for the North American meat market. Therefore, BYND’s valuation should be aligned with Tyson’s, but this is not the case.     

Tyson Foods (ticker: TSN) Revenue and Net Income Comparison for 2018

  • Net Revenue: $40,052,000,000
  • Net Income: $3,027,000,000

Beyond Meat (ticker: BYND) Revenue and Net Income Comparison for 2018

  • Net Revenue: $87,934,000
  • Net Income: – $29,886,000 (negative)      

Since BYND seeks to compete with TSN and should be valued by the same metrics applied to TSN, then BYND to have a market cap of $14 billion or one-half of TSN, should have one-half the net income of TSN.  But, their 2018 net income is -$29.886,000 or $1,543,386,000 less than one-half of TSN’s net income.  Hence, a $14 billion market cap would be very hard to justify.  

Now, my previous hardline or fundamental approach is not a perfect way to evaluate mispricings, nor is it considered “fair.”  Tyson Foods has been a food distributor since 1935 and employs roughly 115,000 people, while BYND has only been in business since 2009.  Nonetheless, there exists an excitement or enthusiasm surrounding BYND and the future of plant-based proteins. There is significant belief among consumers and investors that BYND’s products are indeed superior, very tasty and better for the environment.  Hence, the exuberant culture surrounding plant-based protein and BYND definitely has had a significant positive impact on the stock price. With that being said, from a fundamental standpoint, the price of BYND has gone beyond “fair” and should be considered over-valued.  To take advantage of this high valuation and profit by short selling or placing puts, there exists multiple barriers similar to the Irrational Exuberance passage about Palm.       

BYND, in the past week became the most expensive stock to borrow among stock with over $100 million in short interest and now carries a stock-borrow rate of 74% for existing shorts and 100% for new shorts, according to S3 Partners.  This makes it very difficult for investors to get a worthwhile return by shorting BYND and Ihor Dusaniwsky, of S3 PArtners, summed up this current short disadvantaged situation by stating “With much of its stock held by internal holders or in non-lending retail hands, coupled with a relatively small float, there is little hope of a significant amount of stock landing in lending programs until its 180-day lockups expire on Oct. 29.”  Hence, I continue to defend my statement I made in my previous article Beyond Meat (BYND) in which I stated “I would be weary to short BYND until at least one month after the lock-up end date of October 29, 2019.  With regards to the world of Green Finance, large pools of money desire to invest directly into the meat susbisitiute buisness, due to the meat production industry considered to be a large source of pollution and animal cruelty.  This should continue to put upward pressure on BYND’s stock price and be of considerable risk to any potential short-sellers for the time being.” I’ve already set reminders and alerts for October 29 and will be monitoring this sky high stock for the time-being.   

Also, I recommend reading Irrational Exuberance by Robert J. Shiller, I think it contains a great number of examples, discussions points and tools when evaluating overall market mispricing and individual mispricing.  Hence, I provided it’s amazon purchase link below.
https://www.amazon.com/Irrational-Exuberance-Revised-Expanded-Third/dp/0691173125/ref=sr_1_1?crid=3SISKDY9PD7NH&keywords=irrational+exuberance+by+robert+shiller&qid=1560872096&s=books&sprefix=Irrational+%2Cstripbooks%2C146&sr=1-1

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