Beyond meat the alternative meat producer’s share price is currently valued at almost eighty eight and a half times their trailing sales at the closing bell on Tuesday, and is also valued at infinitely times the profits that the company currently earns. (Yes that’s right). In Tuesday’s trading session Beyond Meat saw a huge rally early on in the day with the company’s share price surging over 18% reaching highs of over $200 USD, however the company couldn’t settle at this level, and instead saw a complete 180 degree turn and give all gains back, and some more. At the end of the trading session we saw Beyond Meat close down a small fraction below.
Many investors who follow Beyond Meat know the story, on the 28th of June the Russell 1000 index, are set to rebalance their portfolio, to include new companies and remove some that are no longer covered. The index itself is designed to hold and monitor every company that trades above a $2.4 Billion USD market cap. Mutual funds, and ETF managers who also follow the Russell 1000 will technically be forced into buying up shares of Beyond Meat, or so many investors were lead to believe. With this rumor on the table many investors seemed to start buying up as many shares of Beyond Meat as they could before the 28th, so that when the day arrives they can sell those shares to buyers who will have to purchase them, given their investment tactics.
However there is an obvious flaw in the plan, as although there will be a large number of investors that do have to purchase shares of Beyond Meat, that does not mean that all investors that follow the Russell index will. At the same time that the Russell 1000 trackers will be facing the arguably bad investment of buying up shares of a company that costs dozens of times its annual sales, a large number of other investors who have bought on this rumor will be free to cash in on this opportunity by selling the shares of Beyond Meat that they bought knowing that a number of investors will have to buy them.
There is a good chance, given the fact that we are seeing a large volume of shares being bought up, that when the Russell does rebalance their portfolio, we will see more sellers than buyers, which could instead of driving the price of the shares upwards, could send them in a nasty downward spiral. The same sentiment can be applied to the rally we saw on Tuesday, with many investors seeing the price rise so rapidly and taking the opportunity to offload a good portion of the shares.
Hannah Xiao – AMT Associates