With the Federal Reserve, along with most major central banks, once again backing away from raising interest rates, even as a global economic slowdown looms on the horizon, the prospect of a near-term reversal of ultra-low interest rate policy is unlikely.
Thus, the companies that have benefited from the consequent capital glut to date, and that many value-oriented and contrarian investors see as bubbles poised to pop, may have more runway than their detractors believe.
Case in point: Beyond Meat Inc. BYND.
Betting on an industry
If Beyond Meat, a maker of plant-based meat alternatives, can present itself as the leader in its industry, it has the ability to build a narrative around itself as a proxy for the fake meat market as a whole. In other words, the company has successfully convinced the market to mistake the map for the territory, and a single player in a large and competitive market for the only such player. Because it is the only available investment option for a common investor, Beyond Meat becomes the proxy for betting on the growth of its industry -- irrespective of its own particular strength as a company.
This is important because as long as Beyond Meat is able to maintain its position as the perceived only game in town for investors to bet on its industry, it will be able to tap capital markets at its eye-watering valuation. There is no obvious sign investors have lost their appetite for throwing cash at the plucky fake meat business.
At the same time, so long as Beyond Meat can maintain anything like its present massive valuation, it can raise billions of dollars in secondary stock sales with shockingly limited dilution.
Bears hoping the capital taps will be switched off overnight should think again.
Read more here:
- Beyond Meat: Let the Dumping Begin
- Something's Not Right at WeWork
- Beyond Meat Tumbles on Secondary Public Offering, 2nd-Quarter Net Loss
Irrational hatred meets irrational exuberance
Access to capital is not the only thing investors thinking about betting against market darlings should consider before taking the plunge. Irrational and ideological hatred (or mere distates) can cloud an otherwise sound short thesis. Bloomberg’s Joe Weisenthal recently offered a valuable case study of this phenomenon with regard to Beyond Meat:
“Beyond Meat really just triggers people on all kinds of levels. Fed-driven bubbles, communism, climate change, feminism and so forth. It makes it the perfect thing thing to fight about right now.”
This is at the crux of the dilemma for many observers. We see a company that has found a huge amount of love in the market since its initial public offering, yet has one of the most adamantly angry bear packs circling it.
Value-minded investors often find themselves pulling their hair out at the seemingly insane valuations of a crop of fairly young companies, many of which seem to lack clear and certain paths to sustainable profitability. Obvious examples include the likes of ride-hailing businesses Uber Technologies Inc. UBER and Lyft Inc. LYFT as well as Netflix Inc. NFLX, a cash-incinerating streaming platform. A company like Beyond Meat, on the other hand, is merely egregiously overvalued; it should be able to build a decent businesses selling fake burgers and other plant-based meat stand-ins. In other words, it is not the future zero that some of its haters believe it to be.
Look before you short
When dealing with obviously overvalued companies, the desire to “short them all” can be very strong. Yet, this desire must always be tempered with an understanding of what makes each company’s financials works, and what makes their stories resonate. Indeed, this is especially important for companies such as Beyond Meat, which sparks moral indignation in large swathes of investors to degrees that may not be wholly rational. Mike Bird of the Wall Street Journal recently reflected on this very point:
“Finance is riddled with angry culture warriors whose market opinions are reverse-engineered from their vague priors about virtue. Thankfully they make absolutely brilliant counterparties.”
There are a litany of badly overvalued companies out there. Eventually, every bubble does pop. It can be delayed for quite some time, however, and the market often has a way of remaining irrational for periods a sane person might deem unthinkable.
Verdict
When approaching a company like Beyond Meat, therefore, it is vitally important to think in terms of a longer-term strategy. Some will offer short-term short plays, but most of these bloated behemoths will be ground down gradually as the hopes of irrational exuberance give way to reality. Thus, long-dated put options are likely to be your best friend when positioning yourself for big tech and bubble stock shorts.
Disclosure: Author is short Beyond Meat, Netflix and Uber.
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