The Telescope Investing strategy is to ‘buy & hold’ – we seek to buy good companies and hold them for the long-term – but that doesn’t mean we never sell. This week on the pod we revisit our thoughts on when it might be the right time to sell a stock.
You might want to sell for a personal reason:
- You need to raise cash
- It’s become too big a position in your portfolio
- The company’s mission no longer aligns with your personal values
- You’ve found a better investment opportunity
- You’re no longer interested in tracking the company
Or there might simply be a fundamental reason why a company is no longer right for your portfolio:
- Broken investment thesis or worsening financials
- Increasing competition or commoditisation of the product
- Change in the business model
- Signs of fraud!
- Mismanagement or lack of vision
We also consider this framework for our own portfolios and do a shallow-dive on Beyond Meat (BYND), a plant-based meat producer that we’re both considering exiting, to see whether it’s time to moo’ve our money to another stock.
If you enjoyed this episode, please subscribe to the Telescope Investing podcast at anchor.fm, or on your podcast platform of choice
Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Monday the 27th of September.
Luke: Welcome to the Telescope Investing podcast.
Intro
Luke: Albert, our strategy is buy-and-hold. We like to buy good companies and hold them for the long-term, but that doesn’t mean we never sell.
Albert: However, selling can be harder than buying, and feelings of FOMO can be stronger as you already own the stock, but there are some good reasons for selling.
Luke: So we’re going to get into some of those reasons today. And actually, you and I are both considering selling a couple of things in our own portfolios, so then we’re going to do a bit of a mini-dive on one of those, Beyond Meat.
Albert: You know, it’s funny, Luke, we planned this episode around a week ago, and in that time we’ve seen a slew of tweets or articles about when’s the right time to sell a stock. I think maybe as a case of seeing things more often when you’re thinking about it.
Luke: I see a ton of those too. It could be that confirmation bias, but it could also be the fact that the market is getting back to a high and maybe everyone’s in the same state of mind thinking, how do I free up a little bit of cash and get myself ready for potentially another downturn at some point?
Albert: Yeah. I saw some news articles saying that some of the investment banks see a big correction happening sometime this year. Maybe that’s giving people some pause and maybe take some money out the market.
Luke: Yeah, I suppose that’s what I’m doing. I feel like I’m too thin on cash right now, down to just a few percent. So I’m looking for opportunities to sell so I can create a bit more of a buffer.
Albert: Well, you do realize that if you sell on fears that the market is going down, that’s a self-fulfilling prophecy.
Luke: Uh, yeah, I guess none of us can really predict what’s going to happen. Although there is one little animal I think you spotted for our news article that does seem to have quite a good view of the future.
Albert: Yeah, I was flicking through Twitter last night, as you do, and I saw this news article where it said a hamster has been trading cryptocurrencies in a cage rigged to automatically buy and sell tokens, and it’s currently beating the S&P 500!
Luke: Yeah, Mr. Gox sounds like he’s a very smart little hamster. He spins his wheel to choose the cryptocurrency and he runs through a particular tunnel, one to buy on one to sell.
Albert: And I believe his portfolio is up 20% since he started quote-unquote trading in June.
Luke: And that’s, I guess, in the backdrop of quite a heavy cryptocurrency crash quite recently on the news of China banning crypto. Mr. Gox has navigated this one successfully.
Albert: Now, obviously we’re not saying that Mr. Gox has any trading skill here and of course, it’s just random and it says more about crypto than hamsters.
Luke: Yeah, absolutely. There’s a lot of further around cryptocurrency still. You know, I think to some extent, though, it might be founded in fundamental value. There are some cryptocurrencies that could be the future of the internet, web 3.0, platforms like Ethereum, Solana. Is it Solana? Or is that an ice cream? Solero! Solana, Polkadot. There could be some tokens that are enabling decentralized ownership, and that could be quite an exciting innovation for the future.
Albert: But I believe there’s around 6,000 cryptocurrencies out there. How do you choose the ones that will be the ones powering this change that you’re talking about?
Luke: Well, if you don’t have a handy Mr. Gox to let you know by spinning his wheel, I guess you have to do a ton of research, just like we do with stocks. There are thousands and thousands of listed companies, not all of them are going to be the winners of the future.
Albert: I freely admit that I know next to nothing about cryptocurrencies, so I’m not going to advise you or anyone what to do with cryptocurrencies. And I have been thinking myself just to get some, just to get some skin in the game. And the two that I’ve been considering are Ethereum and Solana because they seem to have an ecosystem building around them.
Luke: Yeah, I agree. Certainly, Ethereum is the monster when it comes to non-fungible tokens and defining ownership, but you’re right, there are other currencies that have got similar capabilities. And in my mind, these currencies do distinguish themselves from platforms like Bitcoin, which are really just a store of value.
Albert: Yeah, they say Bitcoin is digital gold, right? Anyway, do you want to sell one of your stocks, Luke?
You need the money
Luke: I’ve got a bunch of stocks I always can think about selling, but I think as we say in the past, we try and have a tendency towards inaction. So I haven’t sold anything for quite a while now. There’s a whole bunch of reasons why you might want to sell. And I guess you could categorize these as either personal reasons or fundamental reasons. Maybe just to get us started. The biggest, in my mind, personal reason is you need the cash.
Albert: Well, that is the number one reason, right, Luke? If you need the cash, then you don’t have a choice, you’d have to sell.
Luke: But it’s kind of silly and your strategy has been wrong. You shouldn’t have got into that position in the first place. A good rule is you shouldn’t put money into the stock market that you’re going to need in the next five years, actually, maybe in the next 10 years or longer. The market tends to increase over the long-term, but in the short-term, anything can happen and you don’t want to find yourself having to take money out of the market where we’re in a bit of a trough.
Albert: Personally, I think five years is a little bit too long, but I get your point. That is a good rule of thumb. And you don’t have to keep that cash sitting around. It’s recommended that you have six months of living expenses in cash, so if you lose your job, you won’t be in trouble, you can actually keep yourself going until you find another job, but the rest of it can be in savings accounts, time deposits, or even bonds if you can handle a little bit of risk. But at some point, you need to liquidate. For example, when you retire and you’re living off your savings, you may be selling some stocks that can be part of a planned drawdown.
Position has become too large
Luke: So another personal reason why you might want to sell it’s just that your position has become too large. This is a really great problem to have. It’s one that you and I have wrangled with many times over the last couple of decades. For me, I suppose, earlier in my investing journey, it was Netflix driving all of the big increases in my portfolio, and I had to keep trimming Netflix because it was becoming an unsustainably big part of my portfolio. And then in the recent five or six years, it’s been Shopify that’s taken that honor, and I’ve had to trim Shopify again, just to manage my exposure to that one company.
Albert: Yeah, our portfolios are quite similar, Luke, and I think I’m the same. Over the years, I’ve had to trim Netflix, Shopify, and Tesla. And the size they reach when you become inclined to sell can be different for different stocks because you do have different levels of conviction for each of these stocks. For example, I’m perfectly happy to keep about 20% of my portfolio in Shopify, but if that was in Tesla, I’ll be quite nervous.
Luke: Yeah, I think that’s a very fair point. You have to have an exposure in your portfolio to a company that matches your conviction level. In the long-term, I’m convinced Shopify have an enormous runway ahead of them. They’re less than a $200 billion company today. I can see them at least 5X-ing that over the five to 10-year term. I’m not sure I could say the same thing about Tesla. There are legitimate questions about their valuation.
Albert: I guess related to this is that you may want to sell when your allocation to a particular sector becomes too large. I think this is the reason why I sold Costco earlier this year, because a significant part of my portfolio is within commerce stocks, and I didn’t really feel comfortable in doing that. I wanted a bit more diversification across sectors.
Ethical reasons
Luke: Another reason you might sell are ethical or personal values. Maybe the business just doesn’t sit right with you for one reason or another.
Albert: Yeah, in an ideal world, you wouldn’t have bought that stock in the first place, but circumstances can change, companies can change, and also you as a person can change.
Luke: Yeah, for me that was non-renewables quite a long time ago when I realized the damage that some of these energy companies were doing to the planet. And then more recently Facebook. I was really on board with Facebook and Zuckerberg’s mission when I bought in, in, I think 2013, 2014, but by 2016-17, I was starting to see the problems that they were causing in society, and it just felt like it wasn’t a stock for me.
Found a better investment opportunity
Albert: And another reason to sell is that you just found a better opportunity for your investment dollars. You found a stock that you are more interested in and you think we’ll do better over time.
Luke: Yeah, it’s an interesting one, isn’t it? Because if you found a better stock and you want to flip your value from one to the other, that’s kind of two decisions you have to make there, and I really try to avoid that, selling to buy. That’s why I’d much rather have that cash buffer. If I feel a stock isn’t compatible with my portfolio, I need to sell it or at least reduce my position. And I like to have at least 5% cash kicking around just to take advantage of these opportunities when they do come up.
Albert: And I mentioned earlier that I sold Costco earlier this year so I could put those funds into other companies in other sectors, but I’m somewhat regretting my decision to sell Costco, as the stock is up 33% since I sold it. It’s outperforming most of my other positions in that time. But seeing the correct decision is easy with hindsight, so all we can do really is make the best guess with the information that we have at the time.
And we had an amusing chat last week when you said that you usually forget about stocks once you sold them, whereas I keep track of all my sells for the purpose of learning from my mistakes. And you said that this was psychologically damaging.
Luke: Yeah, you know, I find it tough enough to deal with positions like Magnite that are massively in the hole for me, let alone adding on the psychological weight of the FOMO of realizing I sold something and then doubled or tripled.
Albert: Well, it is educational. I looked back at them early this morning, and most of the stocks do recover given enough time, and out of the 40 or so stocks that I had bought and subsequently sold over the past 20 years or so, most of them have underperformed the S&P since I sold, but a couple do stand out as bad sell decisions. For example, Activision Blizzard, which is up 540% since selling. Lululemon, which is up 430%, and 3D Systems, which I managed to sell just a few months before the whole 3D printing sector rebounded.
Luke: Well, look, I made the same 3D mistake. I’ll give you that one, but, so what did you learn though, from your Activision and Lululemon sales?
Albert: First of all, what you learn is that most stocks still go up over time. They may not beat the S&P but for a lot of them, it’s pretty close. They usually grow at a CAGR of around 10%. That’s one lesson that I saw, so this tells you that not selling is often not a bad decision. And for the things that I sold that have done really well, I look at them and I wonder why, why did I sell on why have they done so well? I think it’s because in a lot of cases I didn’t do enough research in selling. I just saw it on a gut feeling and I should have done some due diligence before selling.
No longer interested in the company
Luke: Which we’ll try and do today for Beyond. It will be quite interesting. I’m definitely in the sale camp for that, but let’s see where we end up after we have that discussion. But before we get there, let’s just recap the last few reasons to sell. So, I would say the last personal reason I can think of is you’ve just lost interest in the company.
Albert: Clearly a stock’s performance is not affected by how much you are personally interested in it. And this is probably the weakest reason to sell a stock. However, if you are following a stock, reading news about it, and listening to earnings calls, it does help that you have a passing interest in its business. And to be honest, this was probably the main reason why I sold StitchFix last year. I had no interest in following their business, even when the stock was doing well.
Luke: Yeah, you do need that personal motivation to cause you to go and do your reading and read the annual reports and get excited about the mission of the company. If that passion’s not there anymore, there’s probably better places to put your investment dollars.
Albert: You say that, but I’m inclined to ignore this reason for selling. If a company is performing well, maybe just let it go about its business and you go off and do something else. We talk about removing emotion from investing, perhaps this should include personal interest as well.
Luke: I agree and I disagree at the same time. I do think a lot of the value that you and I get in our portfolios is driven by our own passions and hobbies. We actually find reading about these companies quite fun. And so that becomes a really virtuous self-reinforcing circle where you learn more and you make better decisions.
Albert: In general, I agree with you, Luke. I am actually interested in most of my stocks in my portfolio.
Worsening balance sheet
Luke: Yeah, I suppose those are a couple of really good personal reasons why you might want to sell, but there are some fundamental reasons as well, things that are actually happening with the company itself. And maybe the very first one of those is just that that balance sheet is starting to crack. They’ve got worsening metrics.
Albert: And we’ve had a recent example of this with Evergrande, the property giant in China, who we’ve read had $300 billion of debt to service.
Luke: Clearly I’ve seen Evergrande in the news, but hadn’t looked into really what went wrong and how the wheels came off. Do you think that should have been apparent to investors in the quarters leading up to the failure?
Albert: Maybe. Maybe if you had kept a close eye on their balance sheet, you would have seen this as a potential problem coming up in the future, but it’s hard to say. I think a lot of people got caught out with that.
Increasing competition
Luke: So, somewhere where there really is no excuse though, to get caught out, particularly if you’re interested in the sector and interested in the company, is noticing when increasing competition is on the horizon and maybe the company’s products are just becoming a bit commoditized.
Albert: Yeah, I think this is the main reason why I’m thinking of selling Beyond Meat, which we’ll cover later. And this is a difficult one to overcome often requiring a risky pivot in some cases, and also a large dose of luck.
Albert: And a related problem to this is when a brand is devalued in some way, and this is often seen in the fashion industry. Like, it takes a lot of work and luck to be seen as a desirable brand, but it’s very easy to lose that cachet. And once it’s lost, it’s really difficult to get it back. And this can be disastrous for the stock if much of its value comes from its brand. And I think has happened to Coach and to some extent Under Armour.
Luke: And, you know, brand can be very fragile, and I guess if a company’s brand is damaged, it could happen very, very quickly. Maybe just something as silly as an ill-informed late-night tweet from the CEO. And suddenly if you’ve got many of your customers boycotting your product, that could destroy a company almost overnight.
Weak vision from management
Albert: Another reason why you might want to sell is that you think that the company has a weak vision for growth or there’s a change in their business model. And there’s a classic story of Netflix versus Blockbuster, but you have another one, right, Luke?
Luke: Yeah, I didn’t actually know this story. I found it when I was researching for today’s episode. Evidently, in 2001, Borders, the bookseller, outsourced all of the online sales of books and music and DVDs to their competitor, Amazon. And that was supposed to be a partnership that was going to bring in additional sales, but the writing was on the wall for Borders. Purchases in their physical stores suffered. What ended up happening was customers would use Borders to window shop and then make their purchases through Amazon. By 2006, Borders were no longer a profitable business. And five years later, they declared bankruptcy and liquidated.
Albert: Yeah, that sounds like one of the worst business decisions. But then again, at that time, Amazon was not the behemoth that it is now. You couldn’t have seen how big Amazon would grow.
Luke: Yeah, I guess they say, keep your friends close and your enemies closer, but that was probably a poor strategic decision by the Border’s board.
Albert: I [bet they] wished they just bought Amazon at the time, right?
Luke: I bet plenty of people think that.
Signs of fraud
Albert: And moving on to the next reason for selling is if you see any indications of fraud.
Luke: Yeah, a couple of very high-profile examples of this just in the last year or so. Luckin Coffee, who are juicing the numbers in their sales reports. Theranos, who allegedly just had a completely fake product.
Albert: And another one that we mentioned in one of our podcasts is Nikola, who infamously had a video of one of her cars going down a hill, and they just tilted the camera to make it look like it was on a level road. And some people might put Tesla in this group as well. I saw a tweet a few days ago that said there were a lot of parallels between Elizabeth Holmes and Elon Musk. I don’t really buy that, but it went on to say Elon drastically overstated Tesla and SpaceX’s capabilities in the early days. If this fraud had been stopped earlier, we would never have gotten electric cars and reusable rockets.
Luke: Yeah, I think the internet doesn’t get sarcasm. This guy, Zack Kanter was making a bit of a sarcastic point about the differences between companies like Theranos and Tesla. With Theranos’ technology was just literally built on smoke and mirrors and made-up nonsense, whereas Tesla had real science, but a damn hard engineering problem ahead of them.
Albert: But Musk himself it does make quite outlandish claims. And I read the tweet two days ago that gave a very favorable interpretation of these tweets by saying that his tweets are not for investors for his own engineering team to challenge down to push harder.
Luke: Yeah, perhaps. I saw the same tweet. Agree, there could be something of that in it. If anybody is playing 4D chess, it’s Musk.
Albert: You should buy some more Tesla stock, Luke.
Luke: Perhaps. Perhaps. I’ve definitely got my eye on a Roadster at some point, so I might need some more Tesla stock to help me pay for that. So, Albert, we’ve just gone through a bunch of reasons to sell and we’re going to apply this framework to Beyond Meat in a minute.
Mid-ep promo
Luke: But, you know, before we do, I wouldn’t mind doing a quick Mid-ep promo for the Telescope Investing podcast. You and I put a ton of effort into this thing, but we’re still lagging in terms of subscribers. We could definitely be doing better. I saw that on Apple Podcasts, we’ve only got five reviews. Thankfully, they’re all five stars so thanks to our five subscribers who click that button. I’m going to put a bit of a beg out there for a few more five-star reviews.
Albert: Yeah, you don’t get anything in return, just our gratitude.
Luke: But it does give us a bit of encouragement as well. I often try and chat to my Twitter followers about the podcast and get a bit of a conversation going. And it does sound like there are a bunch of folk out there who are enjoying the content we’re putting out. It can be a bit like shouting into the void sometimes, particularly on quiet weeks when we don’t get much feedback. So if you’re enjoying, what Albert and I are doing and the episodes we put together, give us a, like. What do the kids say? Like, and subscribe.
Albert: I think they say smash that like button and subscribe.
Luke: There you go. I don’t know where the like button is, but smash it wherever it is, go smash it and tell your friends to smash it too.
Beyond Meat
Luke: Well, let’s talk about Beyond Meat.
Albert: So we’ve gone through a number of reasons why you would want to sell a stock, and you mentioned earlier that both you and I are thinking about selling Beyond Meat. And I think we should do a little mini-dive into Beyond Meat to see if our sell decision is the right one for us.
Luke: Yeah, and I think you made a good observation when we were planning this episode that often we sell based on instinct as opposed to fundamental reasons, and we don’t really analyze the decision for a sale strongly enough. So yeah, let’s do that.
Albert: Yeah, we definitely put more work into deciding to buy a stock than we do in selling it.
Plant-based meat is fad
Luke: And maybe to get this conversation going, I found quite an interesting tweet from Blue Chip on Twitter, and he put out six reasons why you might consider selling Beyond Meat. Let’s go through those and see if we can deconstruct them a little bit. Blue Chip’s first reason was just that plant-based meat is a fad.
Albert: Well, I don’t think it’s a fad. I subscribe to an alternative protein newsletter published by Green Queen in Hong Kong, and the number of new products being developed is bewildering. I think this is the main bear case for Beyond Meat- competition, and therefore lower margins. In the end, it’s just a food product with relatively low barriers to entry once the technology to make plant-based meat is wildly known.
Luke: Yeah, and it does feel like this is a bit of a stepping stone technology using pea and soy protein to create neat alternatives, but the real technology that you and I have been thinking about for quite a long time now is cultured meat. That’s basically real meat that’s grown in like a soup in a vat as opposed to grown on an animal.
Albert: Yeah, just give it a bit more detail, animal cells are grown in these vats and are then formed into meat as we know it. And as you said, it’s really meat, it’s animal cells. And it’s possible that it may be indistinguishable from the meat that we get from animals.
Luke: To be honest, maybe better than, right? You could get the perfect wagyu steak with all of that beautiful marbling without having to have a herd of cows that you’re massaging every day.
Albert: And the really interesting thing is that we don’t have to make beef or pork or chicken. We can design new forms of meat and maybe that will be even tastier.
Luke: Are you looking forward to a porken burger. They do say when pigs fly… chicken pig.
Albert: That’s a big wing!
Luke: God, yes! Imagine that, like a two-foot chicken wing. Bloody hell!
Albert: You’d be at it for days.
Luke: Yeah, good point. Gigantic animals and gigantic steaks. It would be amazing to see what the American food industry does with that technology.
Restaurants dropping products
Luke: Well, another part of Blue Chip’s bear case was that restaurants are dropping Beyond products.
Albert: I don’t really know where he got this information from. I think if anything, more and more restaurants are selling Beyond products. I know that Starbucks in China are selling meals made with Beyond Meat, and I just recently saw that McDonald’s is getting its new McPlant burger ready, and I believe it’s using Beyond Meat patties. And I really thought that this would be a catalyst for Beyond’s growth given the scale of McDonald’s, but hadn’t really been reflected in the share price.
Luke: Was it ever clarified what the relationship was? Because it was a bit on-again, off-again at the start. I know Beyond are definitely consulting to McDonald’s. Are they actually doing the manufacture?
Albert: I believe so, and I read that McDonald’s has been developing this for three years and are just about ready to release it. I think they tried something in Canada. It wasn’t a wide release. I’d be keen to try it, to be honest.
Luke: Oh yeah, for sure. Absolutely.
Albert: Tell you what, I once had the Impossible burger at a fast food joint here called Triple O’s, and it was so much like real beef that I thought they had made a mistake and gave me a real beef burger instead. And I’ve never had the same feeling with Beyond burgers. I liked them and I will eat one if you gave me one. It has its own taste and it doesn’t really taste like beef at all, but that’s not a bad thing. You might prefer the taste of Beyond beef.
Luke: Yeah, I think they’re pretty good. And if you cook them well, I think you can get a great result. with a Beyond burger. We don’t have Impossible burgers in the UK, or I haven’t run into them yet, but very keen to try one.
Albert: Oh yeah, and I believe Beyond Meat has recently launched its plant-based chicken tenders across the US, and I think we’ve mentioned before that the most popular takeout in the US is chicken wings, so we have to see if Beyond Chicken has that kind of popularity.
Luke: I’ve tried a bunch of alternative chicken products. They are not very good. They’re all a bit rubbery. They definitely don’t have the right texture. So it’d be interesting to see when someone finally gets that formulation right.
Albert: Beyond actually had a Beyond Chicken product many years ago, and I tried it, and to be honest, it was horrendous. So really hope they’ve improved the recipe and made them more edible.
Increasing competition in the plant-based meat sector
Luke: So look, it’s not looking too bad for Beyond so far. We’ve refuted most of Blue Chip’s concerns, but here’s one that’s probably real and he mentions insane competition. Go to any store and you’ve got three more options.
Albert: Yeah, this is the main reason why I’m thinking selling. Reading that newsletter just tells me how many products are being developed and the insane competition that is coming. And even now in Hong Kong, we have Beyond Beef, Impossible Beef, and OmniPork available here in supermarkets. And I’ve used all three and the order of preference taste-wise for me is OmniPork, followed by Impossible Beef, and then Beyond Beef. And the top of all off, Beyond it’s also the most expensive one so we rarely buy it.
Luke: Definitely the most expensive thing in the vegetarian part of the supermarket. I was really hoping Beyond were going to succeed in getting their products into the meat shelf alongside the steaks and the burgers, but they’re relegated to the plant-based section just like everything else.
Albert: And I believe OmniPork is available in the UK, and it’s getting ready to launch in the US as well. And Impossible have a new Impossible Pork out soon, which I’m keen to try.
Luke: I didn’t know about Omnipork. I’ll definitely have a lookout for that. Katrina and I try to be broadly vegan about four days a week. Like I say that, but at the same time, when we eat meat, we eat meat. I had a ton of barbecue just yesterday.
Albert: Any vegetables?
Luke: Does tomato ketchup count?
Albert: Not only are these new companies coming out with plant-based products, but traditional meat companies like Tyson Foods are coming out with their plant-based options. And I found it really funny when I saw that Tyson no longer call themselves a meat company but a protein company.
Luke: That’s a very clever spin.
Albert: I thought so. Nice one, Tyson. And also food giants like Nestle have plant-based products and they have huge economies of scale.
Luke: Yeah, they definitely got the distribution and everything else in place that makes it easier for them to succeed as a business. I guess you’re never going to capture the segment of consumers that have switched to meat alternatives for ethical reasons. Like you wouldn’t want to support a company like Tyson Food with your veggie burger purchases.
Stalled sales growth
Luke: So, Blue Chip had three more reasons too, though. Let’s go through those. The next one was that Beyond sales growth has stalled.
Albert: In their second-quarter earnings call a few months ago, they booked a 30% increase in revenue, but most of that came from international. And they break out sales between retail and the food business, but US retail sales had a tough comparable this year because last year, sales rose dramatically as households stocked up on food as the pandemic lockdowns started. And for related reasons, the US food service sales were much higher than last year because restaurants had a tough 2020 as everyone stayed at home. Restaurants have really rebounded this year with home delivery ramping up and also people go out more to restaurants. But overall, US revenue for retail and the food business combined, it was only up 4.8%.
Luke: But Beyond’s international growth has also been pretty robust, increasing almost 200%. Overall, international sales are up 180% year over year, and that’s really helped them lift their total revenue growth to 32%. That’s not bad.
Rising operating losses
Luke: Blue Chip’s next reason is that Beyond are bleeding cash. Their operating losses are increasing.
Albert: Well, setting up a processing plant is not cheap. It’s a capital-intensive business, making a low-margin product, and profitability comes from economies of scale. But you also need R&D to develop new products and refine existing ones just to keep up with the competition. Beef is the most widely-eaten meat in the US after chicken, but in Asia, it’s pork, and Beyond Meat has developed a Beyond Pork product specifically for the Asian market. And it’d be interesting to see how it takes off and how it compares to OmniPork developed by Green Monday here in Hong Kong and the Impossible Pork coming soon.
Luke: I hadn’t realized this but you noted that they’ve recently trademarked the name Beyond Cheese. I guess they’re trying to branch out of that meat market into other animal products, and cheese is probably an interesting one. I gather is often cited as one of the hardest choices when going vegan, can you give up your cheese?
Albert: Can you give up cheese, Luke?
Luke: I like cheese. My life wouldn’t be over if I couldn’t have cheese. My wife loves cheese. We’ll often on a Saturday night after dinner, we might have a late-night cheese party.
Albert: So there’s no way Katrina’s going vegan, right?
Luke: It’s vegan with some exclusions, yes.
Albert: Or maybe this Beyond Cheese will change her mind.
Deteriorating margins
Luke: Let’s bring it back to Blue Chip rather than blue cheese. His last reason was deteriorating margins.
Albert: Well, as we mentioned, increasing competition will restrict Beyond’s pricing power and possibly force it to lower prices to maintain sales. Maybe margins can start increasing again once economies of scale kick in and the costs of production come down, and reaching price parity with animal-based meat may be a turning point as consumers will not have to choose based on price. But I see that margins for most food products are low with gross profit margins of around 20% and net profit margins of around 5%, and there’s no reason to think that plant-based meat won’t be the same.
Luke: Yeah, it’s definitely commoditized and that’s reflected in their pricing power and Beyond, they do have a more expensive product on the shelves at the moment. Yeah, times Beyond were selling for 25 times sales, that’s rich for a food company. I think they’re down to 15 times sales now after recent price drops and a couple of analysts downgrades.
Albert: Yeah, I believe it’s down 43% from its 52-week high and the stock is down 9% year to date, while the S&P is up 18%, so it’s definitely lagging the market.
Luke: We should have done this episode at least three or four months ago.
Albert: Yeah, we would have sold at a higher price, huh? And at 25 times sales, it’s very high for a business growing revenues at only 30%. And it just for comparison, I looked up Twilio, and Twilio is also having a tough year this year and is only up a few percent year to date. Its price of sales is 25, but it grew its revenues 67% year over year in its last quarter. Some of that additional revenue came from acquisitions, but even with those stripped out revenue still grew 55% over the year.
Luke: They’re very, very different businesses though. Twilio, selling software as a service compared to Beyond Meat, selling their plant-based burgers.
Albert: Absolutely. But we do seem to be living in a high-multiple market where price-to-sales ratios of fifty, one hundred, or even higher seem almost reasonable. That doesn’t mean you should invest.
Luke: Yeah, you know, we did that episode a few weeks ago and reflected on the fact that tech companies had a high valuation, but is Amazon really a tech company or are they a retailer? Are Square a tech company or they’re actually a payment processor? Perhaps though, some of those crazy tech valuations have got associated with companies like Beyond Meat. Look, let’s face it, there’s technology involved in Beyond Meat, but they’re a food manufacturer and food manufacturers don’t attract those same kind of margins as software.
Summary
Albert: Yeah, I think that’s all the reasons that Blue Chip gave to why you would want to sell Beyond Meat. So as we bring it to a close, I think I can summarize by saying I find it difficult to see Beyond Meat being a big winner from here. As a comparison, we mentioned Tyson foods. That’s the largest meat producer in the US by sales, and it has a market cap of $28 billion. And if Beyond Meat could reach the same size as Tyson, and that’s a big if, that’s only four times its current market cap of $7 billion, and as market multiple is sure to drop as it grows and as competition starts taking market share. So I think we’re looking at around two times or three times the stock price from here and who knows how long that will take.
Luke: Yeah, you know, bringing together all of those different reasons to sell. As you say, they’ve got, what’s becoming a commoditized product in a marketplace with a ton of competition. Their margins are compressing and that increasing competition is starting to impact their sales. It’s a tough business. And as you point out, maybe as the upside is limited if one of their main competitors is only three or four times bigger than they are today.
Albert: Yeah, when I first invested, I thought it was a start or a big shift towards plant-based foods, and I probably overestimated this because I was myself reducing my meat consumption and I started eating more plant-based meat. I think the shift has happened but it was nowhere near the extent that I expected. And sometimes I think I’m holding onto this stock because I want plant-based meat to succeed. Well, you also need to believe in the company and its business, and just because you liked the company and its products doesn’t mean it’s a good investment.
Luke: Yeah, that’s a powerful statement. It’s very true. And I definitely suffer from the same habit with some of my stocks, definitely kind of wish fulfillment over fundamentals. I also really want the plant-based meat sector to succeed, but there just aren’t that many good public investments out there right now. I think there’s a bunch of really interesting stuff at the VC and in the private equity space. I mentioned a few weeks ago on the podcast, I found a brilliant product called Just Bacon, and I missed their seed round by just a month or so.
And we’ve noted, there are some really great products in the cultured meat sector. Most of those are still private companies You know, maybe they get acquired, but maybe they do come to market in their own right. And there’s definitely gonna be some interesting investments in the next year or two. Maybe there’s just not that much out there we can buy as public investors that’s appetizing right now.
Albert: Appetizing, good one. But that is another reason why many people say they can’t go vegan, which is giving up bacon. Bacon is very tasty.
Luke: I would say if you’re in the UK, give Just a try, very impressive product.
Albert: Well, hopefully, it will come to Hong Kong and I could try it here. I’m not going all the way to the UK to have Just Bacon.
Luke: It’s not just bacon. I’ll send you a box.
Albert: Might go rancid in the post.
Conclusions
Luke: What’s your conclusion, Albert? We’ve done a mini-dive on Beyond Meat. We’ve both got it in our portfolios. What’s your thinking?
Albert: Well, look, it’s only half a percent of my portfolio right now, and whether I sell or not, it’s not going to make a big difference, but I think I’ll wait until the next earnings report to see if sales growth is increasing again. But for now, it’s on my sell list. What about you, Luke?
Luke: It’s about 1%, maybe a little bit over that, of my portfolio. I kind of agree with you that this is probably a bad time to sell. They’re in a bit of a rut. They’ve come out of the pandemic, but the business is still suffering. At the same time, if I think about all of those personal reasons to sell that we started the episode on, I really want to free up some more cash for better opportunities. So I think I am going to sell my Beyond Meat position.
Albert: Well, maybe hold on for a while before you sell because, to be honest, in doing the research for this mini-dive, I think I’ve talked myself into keeping it. There’s the McDonald’s deal, the new Beyond Chicken tenders, and Beyond Pork. They could all boost revenue significantly, but it’s also possible that these products will replace sales of its existing products instead of adding to them. In that, I mean that the consumer base for plant-based meat isn’t growing as quickly as they would like.
Luke: Well, look, I’ll tell you what, I’ll compromise because I do like a tendency to inaction. I’ve now put Beyond Meat right at the top of my want to sell to-do list, but maybe I won’t press the button right now. But let’s come back and look at this one again, post their next quarterly review. I’m definitely on the verge of exiting this.
Albert: Well, maybe sell the stock that is in the second place on that sell list.
Luke: Yeah, perhaps. We don’t really have time to get into it today, but unfortunately, that’s another planet saver, SolarEdge, for a whole bunch of quite similar reasons around competition. It’s definitely high on my list of positions to exit.
Albert: Oh dear, Luke. Maybe you will get back into fossil fuels.
Luke: Definitely not going there, but the same kind of challenge, there weren’t that many public companies with good products.
Quote
Albert: Well, Luke, do you have an investing quote for us this week?
Luke: Yeah, let’s round it out with a related quote from Peter Lynch. Peter says, “There’s no such thing as a worry-free investment. The trick is to separate the valid worries from the idle worries and then check the worries against the facts.”
I guess we’ve just done that. We’re worried about Beyond Meat. We’ve had to look at the facts. We need to decide whether these worries are enough to trigger us.
Albert: As they say, there’s no such thing as a free lunch.
Luke: Aha, boom, boom.
Wrap
Albert: Well, that’s for this week. Thanks for listening.
Luke: If there’s a future topic you’d like us to cover, you can message us on Twitter. I’m @LukeTelescope.
Albert: And I’m @AlbertTelescope, or you can email us at feedback@telescopeinvesting.com.
Luke: If you enjoyed today’s episode, you can find more content at our website, telescopeinvesting.com, where you can leave us a comment or a review.
Albert: And if this is your first time tuning in, perhaps consider subscribing to the website so that you’re the first to hear about new articles and episodes as they drop.
Luke: Thanks, Albert.
Albert: Thanks, Luke.
