Shares of Beyond Meat (NASDAQ:BYND) stock finally ran into some resistance after a monster move higher. BYND rallied almost 100% from the recent lows on April 2 before this week’s pullback.
Beyond Meat is up over 30% in 2020 compared to a 11% drop in the S&P 500. This type of momentum-driven performance never lasts. Expect BYND stock to lose some sizzle over the coming weeks.
Short interest remains high in BYND stock with over 9 million shares sold short as of April 15. This is the highest reading since January on a share count basis. Days to cover, which takes into account stock volume, most recently stood at 2.8. This is the highest level in 2020.
BYND stock rallied an additional 30% since April 15, which has squeezed the shorts. This likely accounted for some of the recent red-hot rally as those shorts were forced to cover.
The Valuation View of Beyond Meat Stock
BYND stock was cut from a “neutral” to a “sell” rating by analyst Steve Strycula at UBS. He lowered his price target to $73 from $90, citing valuation concerns. Strycula says more than half of the company’s revenue comes from food service, which has the greatest risk exposure to a novel coronavirus-based slowdown.
Strycula reduced his 2020 and 2021 revenue projections for Beyond Meat by 6% and 8%, respectively. He believes the current price for BYND stock more than fully reflects the benefits of both its McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX ) partnerships.
UBS is not alone in its bearish tone.
Goldman Sachs also recently lowered its rating on BYND stock to “sell” and cut its price target dramatically, from $129 to $39. Bank of America lowered its price target from $126 to $50, citing valuation concerns as well.
The Technical Take on BYND
Beyond Meat finally had a pullback after reaching extremely overbought levels. Its nine-day relative strength index hit 85 before turning lower. Moving average convergence divergence (MACD) neared the highest readings ever as it approached 5. Momentum also got to overdone levels before it too softened.
Shares were trading at a massive premium to the 20-day moving average – another sign of over exuberance. The last three times all these indicators aligned in a similar fashion marked a significant short term top in BYND stock. There is major overhead resistance at the $125 area.
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More importantly, BYND stock finally had a key reversal day this week. Shares opened on April 27 higher and near the highs of the day at $111.92. Beyond Meat subsequently sold off sharply to close significantly lower and near the lows of the day at $99.63.
This type of key reversal pattern is many times a reliable indication of a short-term top. The buyers have finally become exhausted and the sellers are in control. It is an even more powerful signal given the magnitude of the most recent rally.
Earnings are due May 5 after the market closes. Estimates are for a loss of 6 cents on $86.88 million in revenue. The last three earnings reports have been met with selling in BYND stock. I would expect a similar scenario once again, especially given the recent outsized move in Beyond Meat.
Implied volatility (IV) is elevated in front of the earnings report with a reading above 130. This means option prices are expensive, which favors selling strategies when constructing trades. A defined risk out-of-the money bear call spread, therefore, makes probabilistic sense. It positions to be paid to be a seller of BYND stock at higher levels.
How to Trade BYND Now
Sell a BYND May 8 $125/$130 call spread for a 70 cents net credit.
Maximum gain on the trade is $70 per spread with maximum risk of $430 per spread. Return on risk is 16.27%. The short $125 strike provides a 25% upside cushion to the $99.63 closing price of BYND stock. It is also structured at the major overhead resistance level.
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 weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.
