So often we talk about expectations versus reality. The market will build one thing in its head and if it doesn't happen, then the reactions can be volatile. This includes both downside and upside.
The recent employment numbers are a great example of this. Headlines built up expectations for a huge number of job losses. That happened, but the expectations were far worse than the reality, so much so that stocks reacted as if the news were "good."
On the flipside, we're seeing Friday what happens when investors build up unrealistic expectations in SPAC name Forum Merger II Corp. (FMCI) . The rumor mill had Impossible Burger as a potential company target. Jim "Rev Shark" DePorre and I talked about how it was virtually impossible for a SPAC of this size to do this.
Folks forget that by November 2019 Impossible Burger had already raised $777 million in the private markets. It had a name, venture backing, and celebrity endorsements. At that time, it was also looking to raise around $300 million to $400 million dollars at a valuation between $3 billion to $5 billion.
Forum was floating around $200 million cash, so it would have needed a PIPE, and FMCI shareholders would have received virtually nothing in the new company based on its stock price and needed outside numbers to double up the cash.
Still, that's what speculators decided would happen. Finally, a publicly traded company to compete with Beyond Meat (BYND) . Rather than a direct competitor, however, FMCI is acquiring a complement to Beyond Meat in the plant-based food category.
Friday morning FMCI announced it would be purchasing Tattooed Chef and rolling it out on the Nasdaq. The immediate comparison, of course, will be to the valuation of Beyond Meat. That makes sense in some regards, but if that's the case, the selloff Friday is something I see as puzzling and an opportunity.
I believe the shares are being sold down on disappointment versus the expectations. Warrants are being sold down even harder because the aggressive money, the speculators, chased the leverage. Slingshot up, slingshot down.
I do think worries about the growth numbers are the other detractor here. Beyond Meat just put up a 141% year-over-year revenue growth number in first-quarter 2020 compared to 2019. Tattooed Chef is "only" growing at a 67% compound annual growth rate from 2018 thru projected end of 2021.
I would understand that if its valuation metrics were in the same ballpark, but Beyond Meat with its likely $400 million in sales this year, comes with an enterprise value over $8 billion. FMCI's new company is expected to have revenue around $150 million in 2020 with an enterprise value around $480 million. One of those is a 20x multiple while the other is just above 3x. Also, the Tattooed Chef is expected to have an adjusted EBITDA position in 2020 at $17 million with that number nearly doubling to $31 million by 2021.
The aim here is the frozen food category, a $55 billion market, rather than a direct competition with meat. Tattooed Chef's signature products include ready-to-cook bowls, zucchini spirals, riced cauliflower, acai and smoothie bowls, and cauliflower pizza crusts. It already sits inside Costco (COST) , Sam's Club, and Walmart (WMT) .
I don't envision the same fight to get consumers on board for a trial. Meat lovers are notoriously defensive of their meat, but I don't see the same thing happening with frozen foods.
While I land firmly on the meat side of the world, I can't overlook the strong growth we've seen in the plant-based category. What I thought was a fad has developed into a trend.
Despite the nasty selloff Friday, I'm a buyer of both the stock and the warrants with a longer-term view in mind. It's impossible to call the bottom as speculators rotate out and investors rotate into this name, but the upside potential exists. Even though it's in three big club store names, the product isn't in many of the regional or large grocers.
Based on the action I'm seeing Friday, this type of volume and volume price movement will likely wipe the speculators clean of the stock within the day. While traditional packaged food companies trade at multiples around 2x sales, they don't have this kind of growth rate. Even at half Beyond Meat's growth rate and discounting for a potentially smaller margined business, I would expect this to trade closer to an enterprise value of $1 billion based on 2021 numbers.
For today, disappointment and momentum has taken over, but there's a real story here and one with potential. I believe we'll see this stock trading in the low to mid $20s over the next six to 12 months, so I'm accumulating both stock and warrants here aggressively.
Tim Collins provides options trade ideas each day on Real Money Pro, our sister site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Tim Collins, Mark Sebastian, Paul Price, Doug Kass, and others.
