A good part of successful investing is avoiding the losers. And that includes "zombie stocks," ones that appear to sometimes come to life but are forever dead. Often zombie stocks are down so much investors feel it's either too late to sell them or they're afraid to bail out before a potential rebound in once-hot stocks.
Two former highfliers that could be considered zombie stocks are Beyond Meat (BYND) and Peloton Interactive (PTON) .
Beyond Meat and Peloton became household names and Wall Street darlings, but both are now struggling businesses with little opportunity to thrive. Since BYND and PTON are both down 96% from all-time highs, some investors tend to speculate on a recovery or stick with these portfolio losers.
That's not say zombie stocks, like Beyond Meat and Peloton, can't have short-term revivals, especially around earnings or when short-squeeze mania infects the market. BYND, with a 42% short interest, has seen numerous short-squeezes that ultimately end in lower lows. Two quarters ago, PTON shares were swept up after earnings when the outlook was not as dire as the forecast.
However, don't confuse a stock revival with a business revival.
Beyond Meat continues to bleed cash and has recently resorted to a $200 million ATM (at-the-money) stock offering to provide the cash flow necessary to cover losses and maintain solvency. The dilutive effects of the offering could be profound, potentially amounting to dilution of over 30%.
Peloton is closer to break-even cash flow, but it has yet to prove that its business model can thrive beyond the moment in time when it had the exact right product for a pandemic.
Both Beyond Meat and Peloton have looming debt issues. Indeed, when money was generally free, these companies issued cheap debt to finance operations.
Beyond Meat has $1.15 billion in zero coupon convertible bonds, due in 2027, trading at $23.50. With a yield to maturity of 42%, the market deems the likelihood of debt repayment as slim. Future refinancing with far more expensive debt will be a challenge without a restructuring since the company has cash flow issues before adding any cumbersome interest payments.
Peloton had also issued $1 billion in a zero-coupon convertible bond, due in 2026, that now sports a 12% yield to maturity. While Peloton is struggling to achieve positive cash flow, and its finances are not as dire as Beyond Meat's, refinancing the debt at current market rates would add ~$120 million annually in interest payments.
Beyond Meat and Peloton managed to achieve remarkable brand recognition, partly thanks to their stock shares soaring. Still, they have been unable to capitalize by achieving positive cash flow and business stability. Last quarter, Beyond Meat's revenues declined 15% year over year as losses mounted. Peloton's revenues have yet to bottom after the pandemic boom, falling 22% year over year.
Investing in individual stocks is enough of a challenge when buying companies with sound business models and strong fundamentals. Avoid stocks of companies with dubious business models that cannot produce positive cash flow and need dilutive capital raises.
The struggle for growth with looming debt burdens makes Beyond Meat and Peloton zombie stocks and ones to avoid, even when the shares periodically appear to come back to life.
