Beyond Meat stock bulls got what they wanted, and bears could get slaughtered

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One of Wall Street’s biggest concerns about Beyond Meat Inc.’s stock is that current valuations limit potential gains, but the odds are now ‘very high’ that problem will be fixed soon, ironically, by the bears.

Beyond Meat investors got what they were waiting for Thursday, as McDonald’s Corp. said it will begin testing in Canada a burger with a Beyond Meat-made, plant-based patty later this month. That sent the stock BYND, +11.58%  surging 11.6% to $154.34 on heavy volume.

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Jefferies analyst Kevin Grundy said this partnership has the potential to significantly boost Beyond Meat’s (BYND) sales, if it is eventually rolled out beyond the testing phase to McDonald’s 38,000 restaurants worldwide.

Grundy said if Beyond Meat’s patties pass the test, and they eventually account for 1% to 6% of McDonald’s beef volume in the U.S., it could add anywhere from $50 million to $285 million to Beyond Meat’s annual sales.

While McDonald’s MCD, -0.01%   announcement “is what bulls have been waiting for,” Grundy said he can’t recommend buying the stock as valuation keeps him on the sidelines. He reiterated the hold rating he’s had on stock since he initiated coverage, and kept his stock price target at $152, which is 1.5% below Thursday’s closing price.

D.A. Davidson’s Brian Holland wrote in a recent note to clients that a Beyond Meat-McDonald’s announcement wouldn’t change his bearish view on the stock. His concerns that valuations overstate the total addressable market for plant-based meats is what made him rate the stock underperform, with a $130 stock price target.

Beyond Meat did not respond to a request for comment.

Of the 11 analysts surveyed by FactSet that cover Beyond Meat, seven are neutral on the stock, two are bullish and two are bearish. The average price target of $150.70 is 2.4% below current levels.

Although valuations may already be relatively high, that doesn’t mean the stock can’t keep rallying — a lot.

Ihor Dusaniwsky, managing director of predictive analytics at financial analytics firm S3 Partners, said “there’s a good chance that there will be several million shares of short sellers covering their positions and driving BYND’s stock price even higher.”

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He said short interest, or bearish bets on Beyond Meat’s stock, as a percentage of float — shares available to trade — was about 41.6%. That dwarfed the next-most shorted stocks in the packaged foods and meats sector, as short interest as a percentage of float for Hormel Foods Corp. HRL, +0.55% was 13.9% and for Campbell Soup Co. CPB, +0.30%  was 11.6%, according to S3 data.

Meanwhile, the cost to borrow the Beyond Meat stock so they can be sold short was the highest for any stock in the world with more than $50 million worth of short interest, Dusaniwsky said, even before Thursday’s rally.

The borrow fee on existing Beyond Meat shorts was an annualized 141.1% through Wednesday. The next highest was 73.4% for Zoom Video Communications Inc. shares ZM, +0.19%, followed by 70.4% for PagerDuty Inc. shares PD, +4.05%  and 66.4% for Tilray Inc.’s stock TLRY, +0.41%. The borrowing rates for Hormel and Campbell shares were 0.3%.

So even though short sellers had $164 million in mark-to-market profits in September through Wednesday, they had to pay $68 million in stock borrow financing costs to have those shorts, S3 data showed. And with the stock surging on Thursday, short sellers are suffering mark-to-market losses of an estimated $81 million on the day, and an estimated $731.6 million this year.

The stock has run up 135% since closing at $65.75 on its first day of trading on May 2. In comparison, the Renaissance IPO exchange-traded fund IPO, -0.79%  has lost 7.6% and the S&P 500 index SPX, -0.24%  has gained 2.0% over the same time frame.

The reason for the high borrowing cost is supply, as virtually all of the lendable stock has already been lent out, Dusaniwsky said. And as those rates keep rising, borrow fees on lots of 1,000 to 25,000 shares were going at between 300% to 400% early Thursday.

Among the biggest concern for bears, however, isn’t that lendable shares are scarce, it’s that recalls are starting. Basically, bulls who owned shares available for lending have started taking profits, which means the stock bears borrowed so they can short them have to be returned, which requires them to cover their shorts sooner than they may want.

“[W]with market-to-market losses mounting, stock borrow rates accelerating to the upside and stock recalls hitting the Street, the likelihood of a short squeeze is very high,” Dusaniwsky wrote in a research note. “If BYND’s stock price continues this upward trajectory, this will turn into a ‘Whopper’ of a short squeeze.”

Valuation wasn’t Wall Street’s only concern about Beyond Meat

Valuation may have been one of the biggest concerns for Beyond Meat investors, but it wasn’t the only one.

Another was the company’s ability to meet demand. While the company said in its latest quarterly filing with the Securities and Exchange Commission that it has “significantly expanded” production capacity, “we may experience a lag in production relative to customer demand if our growth rate exceeds our expectations.”

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Jefferies’ Grundy helped assuage that concern, as he said one of the reasons McDonald’s partnered with Beyond Meat is the company has the “strong capacity and production capabilities needed to fulfill [McDonald’s] demand if the test run is successful and spurs a nationwide rollout.”

Another concern is that Beyond Meat doesn’t pass McDonald’s test, after Restaurant Brands International Inc.’s QSR, -0.73%  Tim Hortons recently allowed its limited-time offer of Beyond Meat burgers to lapse in some of its restaurants.

But J.P. Morgan’s Ken Goldman noted recently Beyond Meat’s breakfast sausages were extended at most Tim Hortons through the end of the year. “Given that Tim Hortons is largely a breakfast [quick service restaurant]–lunch is a much smaller part of the company’s menu–the sausage extension news is incrementally positive, and at least partially offsets the burger news,” Goldman wrote in a note to clients.

Goldman is one of the two Beyond Meat bulls, as he rates the stock overweight with a $189 price target.