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John Engle
John Engle
Articles (466) 

Beyond Meat: Let the Dumping Begin

A surprise lock-up waiver will see insiders selling big chunks of stock

August 02, 2019 | About:

Since going public in early May, Beyond Meat Inc. (NASDAQ:BYND) has been on a tear. From an initial publi price of $25 per share, it soared to $222.13 per share by the close on July 29. With a market capitalization of more than $13 billion, the company is one of the most hotly valued securities trading today.

The excitement took a big hit on July 29 after the close, however, when Beyond Meat reported earnings for the second quarter. Despite beating analysts’ estimates with quadrupled sales from the first quarter, Beyond Meat’s shares fell sharply after the close upon the announcement of a secondary offering.

Cashing in on market exuberance

When a stock rips upward after an IPO, it is usually to be expected that the company will attempt to cash in on the opportunity by selling more shares. This was especially likely for a company like Beyond Meat, which was trading at more than 50 times sales ahead of the offering announcement.

The market is pricing in fantastic -- and arguably fantastical -- growth potential, but the chance such growth would materialize in short order was always in doubt. Beyond Meat has been around for a decade and the industry it is playing in, while accelerating, has a long and competitive road ahead.

As we have discussed previously, investors can often confuse the potential of one company with that of its whole industry, if it is the only player that can be easily bought and sold in the public market.

Betting on the industry

Beyond Meat is far from the only company advancing the science and acceptability of non-animal meat substitutes. But it is the only publicly traded firm doing so. Thus, Beyond Meat has been the beneficiary of the market’s enthusiasm for meat substitutes.

Yet, there are both private companies playing in the same narrow market, such as Impossible Foods, as well as big food companies like Tyson Foods Inc. (TSN) building their artificial meat repertoire. Beyond Meat is merely the only publicly traded pure play opportunity in the space. But that can be enough to fuel irrational anchoring decisions.

With such irrational exuberance fueling the stock, it makes perfectly logical sense for the company’s management to want to raise growth capital at an inflated valuation multiple.

Busting out of the lock-up

While a secondary offering in and of itself is not surprising for Beyond Meat, there are some issues that make this particular case stand out. Most obvious is the issue of timing. Few anticipated an offering so soon after its IPO, given that it raised substantial capital and could fund operations for some time.

Conventionally, companies wait until the end of the lock-up period, a term during which pre-IPO shareholders and insiders agree not to sell shares in the months immediately following the IPO. In the case of Beyond Meat, all insiders and virtually all pre-IPO backers had agreed to a 6-month lock-up. According to the secondary offering documents, however, underwriter Goldman Sachs (GS) has agreed to waive the lock-up for Beyond Meat. That means insiders are free to sell shares that should not have been saleable until late October.

Rushing to the exit

The elimination of the lock-up is rather shocking, and does not say anything good about Beyond Meat’s current valuation. Indeed, of the 3.25 million shares being sold in this secondary offering, only 250,000 will be new shares. The other 3 million are shares owned by insiders and pre-IPO investors.

The decision by insiders and pre-IPO holders to sell out now should be taken as a serious warning shot by all current shareholders. They clearly know that the stock is way hotter than it deserves to be and are evidently worried that it could cool off before the terms of the original lock-up were complete.

Verdict

This is a company trading at an absurd multiple, with management that does not believe in the share price. It would be supremely unwise to buy in at this stage. The secondary offering will price on Wednesday, July 31. It will likely come with some discount to the current market price, and the selling of more than 3 million shares will likely add further downward pressure.

Whether the insider cash-out will mark the bursting of the Beyond Meat bubble remains to be seen. Price action immediately following the offering announcement has been negative, but not yet catastrophic. But, once investors realize that Beyond Meat is priced beyond reality, the share price will likely fall precipitously.

The insiders are getting out while the getting is good. Prudent investors should consider following their lead.

Disclosure: Author is short Beyond Meat via put options.

About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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