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Beyond Fundamentals 🍔

Beyond Fundamentals 🍔
By Making smalltalk • Issue #27 • View online

As someone who often invests in the U.S. stock market, I keep myself updated on big developments happening there. Not only does the big economic picture impact Indian stocks, there’s also a lot of interesting companies & sectors that a developed stock market like the U.S. offers.
Take the IPO & subsequent bull-run of Beyond Meat, for example. Beyond Meat listed on NASDAQ in May 2019 at an offering of $25, and was up almost 1,000% in less than 3 months!

Source: NASDAQ & Google Finance
Source: NASDAQ & Google Finance
On Monday after market-close, the firm announced its second ever quarterly results as a public company - and the results were quite stellar:
  • The company reported its first ever quarterly profit, 6 months after its blockbuster IPO
  • Earnings per share (EPS) of $0.06 easily beat analyst estimates of $0.03
  • Net sales rose 250% to $92 million, topping expectations of $82.2 million
  • Moreover, the company even raised its outlook for the year - a rather positive surprise for most investors/shareholders
It’s one thing for a company to do well. It’s completely another to beat the expectations of the street so convincingly - these results are probably what most companies (and shareholders) dream of.
Yet, the stock of Beyond Meat was down ~20% on Tuesday, the day after the results were announced. So what exactly happened?
The short answer is that there are technical forces & sentiments at play. While the optimistic bull-run in this stock has been fantastic - so much so, that even after the downslide on Tuesday, the stock still remains up more than 300% from its IPO price.
But most of the early investors in Beyond Meat, including the senior management, had most of their shares locked-in during this period. In fact, about 80% of the company’s total outstanding shares were subject t0 this lock-up!
This lock-up period expired on Tuesday. And this led to fears amongst existing investors that this new liquidity (i.e. increased supply of shares available to trade) will result in a sell-off and a decline in the stock price.
Analysts even came out with reports saying they’re expecting a sell-off due to this reason. But interestingly enough - during the earnings call, CEO Ethan Brown clearly said he’s not looking to sell any of his shares:
“Why would I? I’m entirely focused on long term.. It can be a $40 billion global protein company.”
There were no other comments from the other top 4 investors as well. Yet, despite the spectacular results & the endorsement from its CEO, the stock crashed by more than 20% on Tuesday.
One reason is that indeed some early investors could’ve cashed out by selling some of their shares. We’ll only know this in a few months time when such data becomes publicly available. This would be the one technical reason.
The other, and equally important reason in my opinion, would be expectations & sentiments. Since many existing investors were expecting this to happen, they tried to pre-empt this by selling their shares before others.
And in doing so, investors themselves created the sell-off that they were expecting to happen. Even though the results announced exceeded expectations & clearly showed the company is fundamentally robust & growing.
Reading this was a good reminder of how expectations & sentiments can often override fundamental reasons in the short-run, whether they are justified or not.
This phenomena isn’t unique to the US stock market - it’s a trait of humankind & as such witnessed across the entire globe, including our very own India.
Such instances provide an insight/reminder as to how such mass markets (which the stock exchange truly is) really function. And that while fundamentals of a company are important to the core, sometimes the market’s expectations & sentiments go beyond fundamentals.
Happy investing!
-Vikas Bardia, CFA
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