Supply can crush the bull. You throw enough new merchandise at this market all at once without more money coming in, and you could have a real rude awakening.
It's not easy to see. Sometimes the new supply is as invisible as it is insidious. Last night Beyond Meat (BYND) , the revolutionary plant protein company, reported a pretty unbelievable quarter with great metrics up and down.
CEO Ethan Brown stands for a simple concept: a cow is a terrible delivery system for the protein that's called beef. Darned cow adds fat and cholesterol while spewing methane over its short life before it is butchered in an inhumane fashion.
Instead plant-based protein, fashioned to taste somewhat like meat, is a much better way to go. Yes, it is processed. Sure there are unwanted chemicals and adulterations, like too much salt, although Brown will tell you that it's a work in progress to cut those chemicals down.
Nevertheless, Brown's project is a legitimate disrupter of the $1.4 trillion meat industry. Beyond Meat's growth is staggering: after printing 170% year over year growth between 2017 and 2018, sales accelerated between 2018 and 2019, with a year over year compare of 253%. It's racked up $199 million in sales year to date and a small profit.
If Beyond Meat keeps that pace up it can have a profitable billion company, maybe even multi-billion. Ah, but that's the problem, after pricing at $26 and immediately going to $46, a remarkable jolt in and of itself, and then proceeded to rally 680%, making it by far the best deal of the year. The stock shot up not just because of its novelty or because of Brown's lofty plans to make Beyond Meat far more than just a faux hamburger, but because there weren't enough shares to go around. Therefore, it got bid up too high, so high that short sellers got attracted to it. The short-selling interest made sense because, when the company reached $239, it's all time high and was valued at $14 billion, a pretty ridiculous level when you consider that the Impossible Burger, Nestle (NSRGY) , Tyson (TSN) and Hormel (HRL) are gunning for them.
Believe me the stock's $20 decline today would be even more pronounced if the quarter hadn't been so strong and the prospects so fantastic. But the onslaught of new stock from today's lock-up expiration, can't be easily placed even if a huge percentage of the company had been sold short unless the company is somehow worth $5 billion, its current market cap. To me that's still overvalued and the supply will continue to come out as long as the stock of Beyond Meat stays this high.
Now Beyond Meat is a small enough company that the market can ultimately absorb the stock.
But what happens if we get a bigger onslaught? Well, we are about to find out because the first full week of November will bring about a deluge of equity the likes of which we haven't seen in ages and call me concerned about it.
On November 7, the great Uber (UBER) lock-up expires. There are about 200 million shares that currently trade, and trade badly I might add. On that day another 760 million shares will be eligible for trading. Yep, 760 million shares, much more than is out there right now.
If everyone who wants out goes out and the stock's at $32, I don't know where the bankers are going to find that kind of money. You are talking about more than $22 billion. Where the heck is that going to come from other than other stocks that must be sold. Remember, Uber's been a bust. This unicorn has been around for a while and I suspect that many will want to cash out because they don't want to lose or give back any more money than they already have. I suspect we will get a lot of sellers. Unlike Beyond Meat, this expiration is big enough to crimp the market.
We'd be okay, I think if it were just Uber. However, at the same time we are going to have to deal with an underwriting that no one I know wants to see, the Aramco IPO, which could be valued as high as $2 trillion even that it has earned $46 billion in the first half of the year and produced 10 million barrels a day. We don't know how much stock ultimately will be offered here. We do know that it is supposed to have a 5% yield. I say, though, so what. BP (BP) has a 6.5 yield and that's a terrific growth oil. It just reported a fine quarter this morning and it's getting rocked anyway. Who needs this stock? Who wants still one more fossil fuel investment? This could be the kiss of death for this market.
To make matters worse, the Chinese just keep pumping out junk. Last week the Chinese offered Youdao, ticker (DAO) , which is a China-based provider of on-line learning content and applications. Youdao offered 5.6 million shares with a range of $15 to $18. The deal ultimately priced at $17. It opened for trading at $13.75, down 22% from its IPO price and closed at $12.50, down 26.5% from where it was offered.
And they aren't done. In the next few weeks we will see Fangdd Network Group, a China-based developer of an online and mobile real estate platform and Q&K International, a long term apartment rental platform. These brokers are craven, the buyers just plain stupid. I am in disbelief how horribly these Chinese deals do. I can't blame the government for mulling over the blocking of the deals or trade officials being furious that there is so much government pension money indexed to the Chinese market. Why do we allow this? Are the investment banks that powerful? The exchanges that desperate?
Why doesn't the president do something? Why should these companies, with their sketchy financials, be able to launch here? Why doesn't' the government protect us from these companies as so many are losers and re-index the money from the benchmark, the MSCI, which has a gigantic Chinese representation, 20% by design.
No one is answering these questions.
Now it is never JUST supply that overwhelms the bull. You typically need some errant Fed statement or a vicious tweet that ratchets up the trade war or a slew of disappointing earnings. I think it's a fair bet that you could get just that.
I know that most people do not believe my supply theory. They think something bigger can cause the downturn. I say that may be true but what you have to realize is that when you have billions of dollars of stock out there without a natural home you are going to get pressure on this market. Be ready, the deals are going to take their tolls. Let's hope there's enough money around to absorb them without too much pain.