When a whole market knows something is overvalued, when the shorts AND the longs agree that a stock is too high, recognize that when a lock-up is cracked before its expiration, run, don't walk, away from that stock.
What makes me say this?
Simple. Have you seen the stock of Beyond Meat (BYND) since the pricing of its secondary announced back on July 29 when the stock was at $222?
It's been cut in half.
What's going on here?
I think the top in this stock occurred when the company simultaneously announced a strong quarter and the 3.25 million secondary that including 39,000 shares owned by the CEO, Ethan Brown, a surprise secondary given the October 29 expiration of the lock-up.
The company, especially the CEO, wanted everyone to win on the impromptu insider sale -- and that's a big reason why the secondary was priced at $160, about $60 below where the stock was trading. The deal worked, as the stock traded at $169 soon after. You could have flipped it and made money.
That said, the stock didn't trade higher than that and it's been downhill ever since.
Now one could argue that the stock started its collapse when we began hearing about multiple competitors to Beyond Meat: Impossible Burger, Nestle (NSRGY) , Hormel (HRL) and Tyson Foods (TSN) , to name four better capitalized companies.
But I would contend that it was nothing that cerebral. I believe that the additional shares, the ones that came deep in the hole at $160, broke the tightness of what was a horrendous squeeze that drove the stock from $25 to $239 in a little less than three months' time.
What makes me feel this way?
GoPro (GPRO) . That's Why.
Not many stocks have captured the imagination of the public like Beyond Meat. One of them was GoPro, the so-called ecosystem that, among other things, you wore on your head while doing something someone might find interesting.
Back in June of 2014, GoPro priced one of the hottest deals of the era at $24. The stock quickly soared to $95 about four months later, again on a short squeeze. Like Beyond Meat, you couldn't locate any shares to sell short.
Then, like Beyond Meat, the underwriters allowed the lock up to expire early, giving Nicholas and Jill Woodman, the founders, a chance to sell 5.8 million shares to a new foundation. The stock never looked back either and it quickly fell to $38 after the early expiration. Oh sure, it bounced back to $66 and then it went into oblivion and it never recovered. By January of 2016, the stock traded at $8.
Looking back, I remember having been in Hawaii when the stock hit $90 on the way up and I popped into a surfing store where I saw a movie running of a goat wearing a Go Pro on a surfboard.
When I asked the clerk about it, she said that it was a natural offshoot of a movie its creator had seen of a pig surfing with a GoPro strapped to its head. I recognized that funny ways to use a GoPro had, at last, reached a saturation point, and suggested selling the stock. It was right at the top; I seemed like a genius.
Looking back, I know I just got lucky. If the Woodmans hadn't offered stock at that same time as that darned goat appeared on the surfboard, I think it could have gone even higher. But like with the deep-in-the-hole secondary, just like with Beyond Meat, there was suddenly stock to short -- and the squeeze, which had moved the stock up so drastically along with retail buying, was busted.
The moral? What matters in these situations isn't the fundamentals. Both stocks when they got to their highs were hopelessly overvalued.
Heck, they were hopeless overvalued well before they hit their highs.
But it wasn't until new supply hit the market that they broke.
That was the difference.
Again, I hammer this point home because the biggest enemy of this market is supply. If supply is kept from the market, it can march higher.
But as soon as it is introduced?
Unless there are earnings or real prospects and little competition, then it is game over.
One last thing: Next week, 48 million shares of Beyond Meat get unlocked, 80% of the company's outstanding shares. Will this money-losing company still be worth $6.6 billion?
If GoPro is at all analogous, the answer is No.