18 votes

Beyond Meat has hit the ‘short-squeeze trifecta’ as borrow fees keep soaring

18 comments

  1. [11]
    mat Link
    Can some ELI5 this? I don't think I understood a single sentence of that article.

    Can some ELI5 this? I don't think I understood a single sentence of that article.

    9 votes
    1. [10]
      nic Link Parent
      Some investors are selling short - selling shares they don't have. They do this by borrowing the shares from someone else. They will have to buy back the shares eventually, to return them to the...

      Some investors are selling short - selling shares they don't have. They do this by borrowing the shares from someone else. They will have to buy back the shares eventually, to return them to the original owner. Short sellers have to pay borrow fees. If there are more short sellers than there are people willing and able to lend shares, those borrow fees sky rocket. This has happened with Beyond Meat. Normally short selling is a bearish sign, as short sellers are more informed than the rest of us. Sometimes there is a short squeeze, where the shorts give up on mounting losses and sky high borrow fees and they all rush to buy the stock back. This pushes the stock price up even further, forcing more short sellers to give up their shorts, pushing up the stock price further.

      15 votes
      1. [9]
        mat Link Parent
        That is moderately more understandable, thanks. Bearish? Also, what advantage is there in selling something you don't own? and how can you even do that? What happens to the person who owns the...

        That is moderately more understandable, thanks.

        Bearish? Also, what advantage is there in selling something you don't own? and how can you even do that? What happens to the person who owns the actual share when it's sold, do they get the money or what?

        This sort of thing is why I pay a fund manager to handle my investments ("investments" is a very strong word for the tiny amounts of money involved). I just cannot get my head around any of this stuff. This is how I imagine my non-techie friends feel when the rest of us are talking. Most of the words are familiar but the meanings are not and the processes involved seem arcane...

        7 votes
        1. [5]
          Sahasrahla (edited ) Link Parent
          As I understand it it's a bit like this: If I think Acme is going to do well as a company I can buy their shares, wait for them to increase in price, and then sell them for a profit. That's kind...

          As I understand it it's a bit like this:

          If I think Acme is going to do well as a company I can buy their shares, wait for them to increase in price, and then sell them for a profit. That's kind of the standard way of doing things: buy low, sell high. But what if I thought Acme's share price was going to go down and I still wanted to make a profit of it? Obviously buying their shares now and selling them later won't make me any money so I have to get a bit creative.

          That's where "shorting" comes in. I find someone (let's say it's my buddy Steve) with a bunch of Acme shares and ask to borrow them with a promise to give them back later. (I also offer him a bit of extra money so he'll benefit from the deal and want to do it.) Then, I take those shares and sell them. Let's say I borrow 1000 shares of Acme worth $10 each. After I sell them I have $10,000. That's nice, but I still owe Steve 1000 shares of Acme.

          Here's where the clever part comes in: if I'm right and the share price of Acme goes down then those 1000 shares will be cheaper for me to buy back than I sold them for. Maybe the price goes down to $2 from $10 and now it only costs $2000 to buy the 1000 shares I owe Steve. So I do that: I take the $10,000 I made and buy 1000 shares for $2000 and now I have the 1000 shares I owe Steve plus $8000 in profit. I give Steve his shares back, I give him a bit of extra money for his trouble, and I still have thousands of dollars in profit. I'm a genius!

          Except what if I'm not a genius? What if I'm wrong and the share price goes up? If the share price goes up to $13 it will cost me $13,000 to buy the 1000 shares I owe Steve and I only made $10,000 selling the shares I borrowed. I'm in the hole. Maybe I hope for a reversal of fortune and that the shares will drop below the $10 I originally paid for them, but maybe the opposite happens and they keep going up. Maybe Acme was the next Amazon and soon those shares will be worth hundreds or thousands of dollars. I'm going to be out on the street and Steve is going to send some goons by break my legs.

          This is why shorts are fundamentally risky: if I invest normally I can only lose whatever money I put in, but with a short the sky's the limit for what I can lose. This is why there are some regulations to try to make sure I can pay up if I make the wrong bet. (I think, I'm a bit hazy on the details.)

          Shorts are also pretty controversial. If I short a company then I have an incentive to try to destroy their stock price. Maybe I write articles and give interviews about how much Acme sucks. Sure, if I just bought their stocks normally I could act unethically to try to boost their price, but generally it's considered a bit more negative to try to destroy a stock's value (along with the value of anyone who invested in them). I mean, our whole economic system is based on the idea that the value of the economy will increase over time forever, so having a bunch of powerful people (i.e. rich and well connected investors) with an incentive to burn down and destroy the value of certain stocks is something that doesn't play well with the rest of the system.

          11 votes
          1. [4]
            Parliament Link Parent
            Do most short contracts have a fixed maturity date? How is the term usually structured?

            Maybe Acme was the next Amazon and soon those shares will be worth hundreds or thousands of dollars. I'm going to be out on the street and Steve is going to send some goons by break my legs.

            Do most short contracts have a fixed maturity date? How is the term usually structured?

            6 votes
            1. Gaywallet Link Parent
              Not necessarily. They can, but often they do not (but have other stipulations). More often if shorts are exercised, it's because they are forcibly closed at some point by the company lending the...

              Do most short contracts have a fixed maturity date?

              Not necessarily. They can, but often they do not (but have other stipulations). More often if shorts are exercised, it's because they are forcibly closed at some point by the company lending the stocks. As always, read the fine print.

              Puts, on the other hand, have a fixed maturity date.

              4 votes
            2. Sahasrahla Link Parent
              I have no idea and I hope someone else can chime in. I know the concept but not the specifics of how they work in practice. When I read up on this before the low-level details were frustratingly...

              I have no idea and I hope someone else can chime in. I know the concept but not the specifics of how they work in practice. When I read up on this before the low-level details were frustratingly elusive so I'd be happy if someone else could fill in the details.

              2 votes
            3. nic Link Parent
              While I love the colorful imagery, almost everything Sahasrahla said is misleading. The brokerage will find the shares for you. The brokerage also insists on a margin of safety. If you don't have...

              While I love the colorful imagery, almost everything Sahasrahla said is misleading.

              The brokerage will find the shares for you.

              The brokerage also insists on a margin of safety. If you don't have enough cash or assets to cover the potential losses, they will close you out.

              There is unlimited risk and limited reward however, that bit is quite correct.

              2 votes
        2. Gaywallet (edited ) Link Parent
          The idea is that you "borrow" shares from someone in the same way that you might "borrow" money with a loan. Basically you find a large institution that has a lot of shares in a company and you...

          The idea is that you "borrow" shares from someone in the same way that you might "borrow" money with a loan. Basically you find a large institution that has a lot of shares in a company and you say "give me 100 shares today and I will give you back 100 shares sometime in the future". The bank wasn't planning on selling those 100 shares in the near future, so they let you borrow them (also note that they apply interest to the borrowed shares, much like borrowing money via a loan).

          You turn around and sell those shares, and then re-buy them again in the future when the stock is worth a different price. If it is worth less, you made the difference between the sell price when you borrowed them and the buy price when you re-buy to give back. If it's worth more, you lose the difference. You also lose some money to fees and interest.

          4 votes
        3. [2]
          nic Link Parent
          Bearish vs Bullish. I'm bearish at the moment, because I think the overall market is over valued. I was bullish around 2009-2012. If you are sure it will go down, you sell it high now, and buy it...

          Bearish vs Bullish. I'm bearish at the moment, because I think the overall market is over valued. I was bullish around 2009-2012.

          If you are sure it will go down, you sell it high now, and buy it back low later.

          The lender gets a borrow fee and dividends only.

          The borrower pays the borrow fee and dividends.

          It is allowed as it keeps the market honest.

          1 vote
          1. Greg Link Parent
            In addition, because the way it was first explained to me helps me remember: Bearish = expecting to go down, because bears swipe downwards with their claws Bullish = expecting to go up, because...

            In addition, because the way it was first explained to me helps me remember:

            • Bearish = expecting to go down, because bears swipe downwards with their claws

            • Bullish = expecting to go up, because bulls thrust upwards with their horns

            Could be apocryphal, but the imagery sticks in my head well.

            4 votes
  2. [5]
    rkcr Link
    Can someone explain why so many people are shorting Beyond Meat?

    Can someone explain why so many people are shorting Beyond Meat?

    7 votes
    1. SourceContribute Link Parent
      The chart of revenue vs earnings is basic but gives an okay overview The revenue is growing, but the earnings are low, in the negatives and not keeping pace. In contrast, Maple Leaf Foods...

      The chart of revenue vs earnings is basic but gives an okay overview

      The revenue is growing, but the earnings are low, in the negatives and not keeping pace.

      In contrast, Maple Leaf Foods (disclaimer: I've bought a few shares in them), have revenues that are growing (3.29B in 2015, 3.5B in 2018) and earnings are keeping pace (41M in 2015, 101M in 2018). To be fair Maple Leaf Foods has been around for a long time, and Beyond Meat is essentially a tech startup (or at least funded by tech wealth).

      Maple Leaf Foods acquired Lightlife and I'm sure there are plenty of other competitors to Beyond Meat. It's taken them a decade to get anywhere and now the competitors are all in. The best bet for Beyond Meat is to get acquired and hook into the production and distribution and marketing that someone else can provide and it gives them a nice way to be a money-losing enterprise within a bigger enterprise ;)

      8 votes
    2. [3]
      Gaywallet (edited ) Link Parent
      Profit to earning sales ratio is very high despite large growth. People are worried this is because they don't know how to run a company, I suspect it's more that they wish to run their company...

      Profit to earning sales ratio is very high despite large growth. People are worried this is because they don't know how to run a company, I suspect it's more that they wish to run their company like Amazon and take losses for a longer time to establish dominance before becoming profitable.

      6 votes
      1. [2]
        nic Link Parent
        Their price to earnings is non-existant, as they are running at a loss. Their price to sales is 80. They will have to pull in $2 billion to $12 billion revenue to justify a market cap of $9...

        Their price to earnings is non-existant, as they are running at a loss.

        Their price to sales is 80. They will have to pull in $2 billion to $12 billion revenue to justify a market cap of $9 billion, if existing food companies are any guide. That means growing their $115 million revenue 20-100 fold.

        The next recession will likely happen first...

        4 votes
        1. Gaywallet Link Parent
          right, p/s not p/e, good catch Honestly if they can spread quickly enough 20-100 fold seems possible, but that also ignores the fact that as they grow they will not need to continue to grow at the...

          right, p/s not p/e, good catch

          Honestly if they can spread quickly enough 20-100 fold seems possible, but that also ignores the fact that as they grow they will not need to continue to grow at the same rate - just because they spent x million this year on growth does not mean it will be more next year. At some point they will hit saturation, or close enough to it.

          3 votes
  3. nic Link
    Beyond Meat's short interest is still high. This is resulting in a hefty premium on the puts While revenue is climbing, and losses are static, the price/sales ratio is 80, which is expensive,...

    Beyond Meat's short interest is still high.

    This is resulting in a hefty premium on the puts

    While revenue is climbing, and losses are static, the price/sales ratio is 80, which is expensive, which is bad.

    3 votes
  4. nzealand Link
    as @nic mentioned I looked for companies in the last twenty years that doubled revenue to above $100m and had a p/s over 30 for which we have more than three years of history. Sirius Satellite...

    as @nic mentioned

    Their price to sales is 80. They will have to pull in $2 billion to $12 billion revenue to justify a market cap of $9 billion, if existing food companies are any guide. That means growing their $115 million revenue 20-100 fold.

    I looked for companies in the last twenty years that doubled revenue to above $100m and had a p/s over 30 for which we have more than three years of history.

    Sirius Satellite (SIRI) grew revenue 3x during 2005 to about $187.40m, had a market cap of $8982.70m with a p/s of 48. Revenues grew 30 fold through to today, but that was not enough, and the stock price never went past the 2005 peak of 7.48.

    Brocade Communications Systems (BRCD) grew revenues 4x during 2000 to $329.05m with a market cap of $25,302.85m which is a p/s of 77. It was selling backend during the tech boom, didn't do so well during the dot com crash, and never recovered.

    2 votes