Navigating Beyond Meat Stock's Broken Bubble

Beyond Meat, Inc. (BYND) underwriters priced 9.625 million shares of the meatless food company at $25.00 on May 1, setting the stage for an initial public offering that opened at $46 the next day. The stock then took off for the heavens, attracting a large momentum crowd willing to buy high in hopes of selling even higher. The small public float added to the buying frenzy, with market players ignoring rapid movement and wide bid-ask spreads.

The financial media chimed in with breathless commentary right on schedule, feeding a vertical rally reminiscent of bitcoin's parabolic rise in 2017. Intense buying pressure continued into late July, when the company got greedy, announcing a 2.35 million secondary offering that would greatly dilute the value of current holdings. Worse yet, selling shareholders comprised the majority of the offering, raising fears that insiders thought the high price was unsustainable.

The stock acted in a typical manner after the news, selling off in a high-percentage decline that trapped late-to-the-party shareholders. The story has taken the same bearish twist it did with cryptocurrencies since that time, carving a broken bubble that's unlikely to be re-inflated in coming years. Worse yet, Wall Street analysts who pounded the table during the uptrend have been silent as church mice in recent weeks, and there are no signs that the decline is over yet.

Not everyone is a loser in this cautionary tale because insiders who got the IPO at $25 have arrived at the end of the lock-up period with a 300%-plus profit, unlike Ma and Pa public who are once again left "holding the bag." More importantly, Main Street may not sell in the coming months because it watched the stock soar to the heavens and expects lightning to strike once again. However, market history tells us that parabolic rallies ending in failure rarely get a second chance.

BYND Daily Chart (2019)

Daily chart showing the share price performance of Beyond Meat, Inc. (BYND)

The stock opened for trading in the mid-$40s on May 2, yielding an immediate uptick that eased into a rising channel a few sessions later. It gapped up around 30 points on June 7 after its first public earnings report, sharply increasing intraday volatility and trading ranges for the next two weeks. Bulls took control of the chaos in late June, generating a slow-motion uptick that accelerated into a buying climax in the third week of July.

The secondary offering caught market players by surprise, although it's a common tactic for companies that watch their newly minted shares get scooped up by enthusiastic buyers. However, the company misread demand by a mile, with the announcement acting as a signal for smart money to pull up its stakes and abandon ship as quickly as possible. The departure left dumb money in losing positions, waiting for the "inevitable" bounce that would make them whole once again.

The first leg of the decline settled at June support in the $130s in mid-August. The stock bounced along that level for nearly two months but failed to attract the buying pressure needed to lift price above the Aug. 1 secondary offering at $160. It finally broke down about two weeks ago and filled the June gap, but this classic buy zone also failed to attract bulls, contributing to this week's plunge to a five-month low.

A Fibonacci grid stretched across the four-month rally places mid-summer support at the .50 retracement level, while the clearly delineated continuation gap started at the .618 retracement. The latest selling wave sliced through the .786 retracement level, which marks the last line of defense prior to a 100% retracement into the IPO opening print. Saying it another way, the stock needs to make a bullish stand right here or risk continued downside into the upper $40s.

The Bottom Line

Beyond Meats stock has carved a classic broken bubble that is unlikely to build strong upside in the coming years.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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