The party’s not over yet. Beyond Meat, 2019’s craziest IPO, continues to rocket higher. On Monday, BYND stock soared another 21%, rising $29 per share to $168. The stock has shot up nearly sevenfold since its initial offering on May 1 at $25 per share.
No Reason Needed for Further Gains
During previous rallies, Beyond Meat had some justification for its gains. It beat earnings, or it announced a partnership with a new restaurant to offer its plant-based burgers. On Monday, however, Beyond Meat went up on no news at all.
As CNBC noted, the stock has skyrocketed so fast that all the bank analysts have been left in the dust. The highest price target for Beyond Meat stock is just $125.
Beyond Meat: A Short Squeeze for the Ages
No, it’s not news driving Beyond Meat’s stock higher. Rather, it’s an epic short squeeze. Beyond Meat only sold a tiny fraction of its stock to the public. Insiders and early investors still own the vast majority. That makes it easy for Beyond Meat’s stock to detach from its fundamental value:
Since last week, the borrow rate has soared to more than 100%. This means that short sellers are paying more than the price of Beyond Meat’s stock – per year – to bet against the company. This is insane; unless Beyond Meat’s stock collapses soon, short sellers will be eaten alive.
Why Doesn’t This Happen More Often?
It’s common for IPOs to have small floats. Normally more shares don’t start trading freely until six months after the IPO. So why don’t more stocks go parabolic like Beyond Meat?
Generally, short sellers are able to regulate the value of a new IPO by betting against it. If the price keeps going up, prominent short sellers will launch negative vitriol toward the company, as famed short seller Citron Research did to Beyond Meat:
If the stock still keeps rising, investors can buy put options to bet on the price of shares to plunge. Normally, these factors are enough to keep a stock price in check. On rare occasions, however, a stock simply has more buyers than sellers and shorts and it keeps on going. Once short sellers realize that they are trapped, it becomes a race to close their bets as quickly as possible before the price goes up even more. The last time this happened was with marijuana IPO Tilray, which exploded from $25 to $300.
Why Not Bet Against Beyond Meat?
Beyond Meat’s market cap is now equal to half of Chipotle. It’s worth more than Steak Shack, Wendy’s, Jack In The Box, and Red Robin combined. All this for a company generating $160 million in annual sales and losing huge sums of money in doing so.
Investors are tempted to bet against Beyond Meat’s stock, expecting a similar result to Tilray. But it’s risky. For one, Tilray’s stock dropped significantly twice before its final peak. Beyond could easily dip without collapsing, trapping short sellers. And second, it’s almost impossible to short the stock directly now at most brokerages, while put options are prohibitively expensive.