Operational Momentum

Just over a month ago it began trading at $46 a share. In 26 sessions it skyrocketed 265%, compounding at more than 5% per day.

It’s always hard to make definitive statements about the future, but it feels safe to say that Beyond Meat has become disconnected with the underlying fundamentals.

At yesterday’s close, Beyond Meat sported a $10 billion market capitalization on $88 million in trailing 12-month revenue. For comparison, General Mills, Kellogg, and Tyson Foods all trade at less than 2x sales. I understand this is an assault on actual analysis, but in order for BYND to get to that ratio in ten years, assuming the market cap stays the same, their revenue would need to compound at 50% a year. For some context, Facebook’s revenue has compounded at 45% a year since 2010, Amazon’s has compounded at 52% a year since 1996. Beyond Meat could do the same, I suppose, but what are the odds of this happening? Again, based on this kindergarten analysis, it’s likely that prices have raced ahead of reality.

So why is this happening? Are buyers and sellers jockeying over what fundamentals will be ten years hence? No, they’re playing a short-term game; what will prices be later today or tomorrow. The buyers are winning bigly, and this is how short-term momentum builds. And we remember short-term momentum because it often reverses spectacularly, like Tilray did in 2018. And then we think that momentum is all about us behaving like sheep, and we laugh.

But the market is a lot smarter than we probably give it credit for, and the reason why individual stocks in general build momentum is because they are correctly discounting operational momentum, as Patrick O’Shaughnessy explained on “First Meeting,” with Ted Seides

What’s fascinating about pure price momentum- and the way that we think about this is 3, 6, 9, 12 month trailing windows of total returns versus peers, we think you should also care about the volatility of the momentum. It’s not a Sharpe ratio in calculation but conceptually that’s the idea, nice smooth excess return in the last one-year period let’s call it. What’s interesting about pure price momentum is how much it tells you about operational momentum, so that seems to be the reason that it works is because it’s related to the businesses are growing and getting stronger…Of the highest momentum decile stocks, those stocks in the next year have super normally high operational growth.

Sometimes stocks get disconnected from fundamentals, and these are the ones we remember. And we grab these one-offs and lean on them as a way to think about how the world works. Lucky for us we live in a world awash in data, which at least gives us a chance of seeing the truth rather than believing the stories we tell ourselves.