Hunting down short squeeze candidates isn't a great stock-picking strategy. Short squeezes can certainly be amazingly bullish events. But timing them can be tricky, and these rallies are typically short-lived.
However, just because a stock is ripe for a short squeeze doesn't inherently mean the underlying company doesn't have good growth prospects. Short interest is simply something the trading crowd determines for a particular stock based on its collective perception of that company's future -- a perception that may be swayed by a subset of speculators with a short-term trading agenda.
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Beyond Meat (NASDAQ:BYND) may well be ripe for a short squeeze sooner rather than later, but that doesn't necessarily mean the company's short on solid, long-term prospects. The alternative meat industry is the real deal once you look past all the hype linked to its newness.
Beyond Meat has undeniable growth
Not every investor will believe that, given Beyond Meat shares' extreme volatility since IPO'ing in mid-2019. From its public offering price of $25 per share to that year's peak near $234 to 2020's low near $43 to last year's high of $221 and back to its current price near $64, this stock exhibits all the characteristics of a company that's counting on excitement as a substitute for actual results. The fact that Beyond Meat remains in the red financially after being in business for a decade only bolsters the bearish argument.
But it's been a strong decade on the fiscal front. At its current pace of progress, the company might be able to swing to an actual full-year profit in 2024 on that year's top line of nearly $1 billion.
Data source: Thomson Reuters. Chart by author.
Doubling its revenue between now and then seems like a monumental task. But don't rule the prospect out. The alternative meat market is still young, with a long growth runway ahead.
The numbers vary a bit from one source to the next. Allied Market Research suggests the market will grow from $4.5 billion in 2019 to nearly $9 billion by 2027. Fortune Business Insights pegs the 2028 figure at $11 billion, versus 2020's $5 billion. Fairfield Market Research is even more optimistic, saying plant-based meats could grow into a $13 billion business by 2026. Longer-term, market research outfit Kearney estimates that only 40% of 2040's projected $1.8 trillion meat market will reflect actual meat sales. The larger remainder will stem from sales of vegan and cultured meats. That's a big swing from meat's current 90% share and plant-based meat's share of only 10%.
Whichever outlook is most correct (and they all could be), the outlooks collectively indicate good growth is in the cards. Beyond Meat will only need to maintain IRI's estimated 22% share of the alternative meat market to experience impressive growth.
Beyond Meat is ripe for a short squeeze
This long-term bullish backdrop presents something of a conundrum for the stock's current short-sellers, and there are plenty of them.
As of the latest official report from Nasdaq, 20 million of the 63.3 million outstanding shares of BYND stock have been sold short. That's a short interest of nearly 32%, or nearly 37% of the stock's present float of a little more than 56 million shares; both are unusually high levels. It's a conundrum simply because all of these short sellers (traders that have already sold the stock with plans to buy it back later at a lower price) are ultimately rejecting the company's -- and an entire industry's -- likely growth.
BYND data by YCharts
That's the basis for any short squeeze, by the way. See, the only way to close out such a position is to buy that stock back to "cover" the short trade. The only question is one of price. Will you be able to buy a stock you shorted back at a price below your sale, or will you pay more than that price to buy the shares you don't actually own but need to deliver? Whereas the risk of any conventional long trade is simply the amount of capital allocated to a particular position, the risk of a short trade is theoretically infinite. Savvy speculators often try to push a highly shorted stock like BYND higher and force some short-sellers into panic buying, which induces more panic buying until any and all short-sellers finally throw in the towel, buying their shorted stock back at any price just to cut their losses.
Given the impending growth of the plant-based meat business and Beyond Meat's place in it, the case for buying the stock now that it's been cut in half since the middle of last year seems much stronger than the case for continuing to short it here.
Real results always win in the end
The long-term bullish argument still doesn't help would-be buyers right now. Short sellers have organized their efforts, in fact, and have quickly quelled any prospective rebound rallies. And the fact that too many traders got too excited too quickly about the plant-based meat industry's potential made BYND shares an easy ticker for short sellers to target.
This organized effort, however, will eventually give way to real results. It's entirely possible the next short squeeze will actually mark the beginning of more normalized upward progress for this beaten-down name. The hard part is knowing there's no clear picture about when that bounce might start to materialize.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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