Shares of Beyond Meat (NASDAQ:BYND) briefly passed the $200 level yesterday before ultimately closing lower on the day. Beyond Meat stock is now up an eye-popping 580% from the IPO price of $25 in early May. While momentum can take stocks well past any semblace of sanity, ultimately valuations do matter. The insane rally in BYND stock has finally come to an end.
Analysts are seeing Beyond Meat stock price as way too expensive. On June 11, J.P. Morgan analyst Ken Goldman cut his rating on BYND to neutral from overweight, citing valuation concerns. Since the downgrade, Beyond Meat has actually risen 45 points, or nearly 35%, in the past week. Other firms are also leery on Beyond Meat stock at these levels with price targets well beyond the latest closing price of $169.89.
Tellimer Research chimed in yesterday with a tweet highlighting just how extreme valuations have become.
Competition is beginning to mount in the fake meat space as both Tyson and Nestle have made a big push over the past month. This should lead to lower margins and provide a headwind for growth … both definite negatives for Beyond Meat.
Sky high valuations, as we know, can last longer than expected. This is especially true for heavily shorted, momentum-driven stocks like BYND. Once the momentum is broken, though, reality tends to set in. Yesterday was the day that we finally saw things get real.
BYND stock made a new high and briefly broke above the $200 level yesterday before reversing in a big way to close slightly lower on the day. This type of price action, called a key reversal day, is a reliable indication that the previous trend has come to an end. It is even more powerful given the magnitude of the rally preceding the pullback.
It also smacks of an epic short squeeze, with the shorts forced to capitulate and cover. The Chaikin Oscillator, which is a measure of momentum, has also turned negative.
The combination of ridiculous valuations and a momentum massacre points to $200 as being a intermediate-term top for Beyond Meat stock. BYND, however, is virtually impossible to borrow to short the shares. Fortunately the options market provides a viable, defined risk alternative to take a bearish stance.
Beyond Meat Stock Trade
Buy BYND July $210 calls and sell BYND July $200 calls for a $1.50 net credit.
Maximum gain on the trade is $150 per spread with maximum risk of $850 per spread. Return on risk is 17.64%. The short $200 strike price provides a 17% upside cushion to the $169.39 closing price of BYND stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
