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Beyond Meat Inc(BYND-Q)

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Unusual Options Activity for Beyond Meat (BYND) Poses an Interesting But Risky Tale

Barchart - Thu Aug 18, 7:00AM CDT
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As a wider topic, the concept of plant-based foods is appealing to many consumers. Providing the taste of real meat but without some of the potential health concerns associated with overindulgence, Beyond Meat (BYND) in particular enjoyed early enthusiasm since launching its initial public offering. However, even with recent bullishness in the derivatives market bolstering BYND stock – having been stuck in a bearish channel since October 2020 – the narrative remains risky.

Fundamentally, the underlying product of Beyond Meat allows consumers to have their cake and eat it too. According to Scripps Health, “research has shown that regularly eating red meat and processed meat can raise the risk of type 2 diabetes, coronary heart disease, stroke and certain cancers, especially colorectal cancer.”

Citing data from Harvard School of Public Health, Scripps noted that “One daily serving of unprocessed red meat — about the size of a deck of cards — was associated with a 13% increased risk of death from cardiovascular disease or cancer.”

In addition, “One daily serving of processed red meat — one hot dog or two slices of bacon — was associated with a 20% increased risk of death from cardiovascular disease or cancer.” Theoretically, then, replacing these delectable food items with their plant-based alternatives could yield better outcomes. Unfortunately, this concept hasn’t quite panned out for BYND stock.

On a year-to-date basis, shares have dropped over 46%. Against the trailing year, BYND stock is down nearly 71%. Nevertheless, coinciding with the resurgence of meme stocks, Beyond Meat is back beyond the grave, with the underlying security gaining nearly 56% since June 13 of this year. As well, unusual options activity seems to confirm excitement for the plant-based food specialist.

Betting on a Quick and Sharp Lift in BYND Stock

When the closing bell rang out for the Aug. 17 session, BYND stock raised some eyebrow. Several bullish traders moved into the $36 calls with an expiration date of this Friday (Aug. 19). Volume reached 25,158 contracts against an open interest reading of 385.

It’s an aggressive wager to be sure. For one thing, the transaction represents a leveraged bet since the time decay is significant. Second, the trade features a wide margin for circumstances to go awry. As represented by the midpoint price (55 cents), the bid-ask spread for the aforementioned calls was 9.1%. While it’s not the worst spread to incur, it signifies both a relative lack of liquidity and confidence from the market maker.

Although it’s possible that BYND stock could make the calls profitable (shares closed at $34.71 on Wednesday), the implications behind the move swim against the current tide. Most glaringly, the put/call open-interest ratio for Beyond Meat is a staggering 1.46.

Mathematically, a ratio of 1:1 indicates an equal number of traders buying calls as puts. However, with the equities market generally featuring a bullish bias, the demarcation level is around 0.70. Anything lower than 0.70 indicates more demand for calls; anything higher indicates greater demand for puts.

Right now, with the put-call ratio doubling the aforementioned demarcation, the overall sentiment is bearish.

The Millennials Aren’t Buying

Much of the early enthusiasm for BYND stock focused on millennials. Study after study declared how this generation – and the emerging Gen Z – cared deeply about sustainability. Additionally, the plant-based food industry aligned well with these age cohorts’ concerns about animal welfare.

Moreover, market research indicated that the fake-meat industry could command a valuation of nearly $28 billion by the middle of this decade. Late last year, some experts aggressively doubled down on their bullishness for plant-based foods, targeting a valuation of $162 billion by 2030.

It’s all eye-catching stuff. So, why then does BYND stock have a lifetime return of 48% below breakeven?

Earlier this month, Reuters reported that analysts started slashing their sales forecasts for Beyond Meat, citing supply chain concerns and waning demand.

“Part of the issue with the adoption of the category for new consumers is that you're not going to change cultural tastes overnight,” remarked Mizuho (MFG) analyst John Baumgartner. “Recruiting your next phase of consumers requires more innovation and better tasting products.”

And while Beyond Meat secured test launches with major fast-food outlets – most notably McDonald’s (MCD) – it hasn’t translated this early success and exposure to broader partnerships and menu integrations.

Put another way, the millennials and Gen Z – the ones who are allegedly all about sustainability – simply aren’t opening their wallets.

Too Risky for the Average Speculator

Certainly, Beyond Meat wins on the moral narrative. Given the pressures of geopolitical tensions and climate-change-related issues such as water shortages, the current food supply and infrastructure may need significant reworking. Beyond Meat and its ilk may be able to help.

At the same time, the business of Beyond Meat doesn’t appear to be working. True, contrarian traders can move against the grain. While the rewards could be substantial, so too are the risks.

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.