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How Beyond Meat's Stock Price Proves the Market Is Rational

By Tim Beyers - Jul 18, 2019 at 7:30AM

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When limited supply meets excess demand on both the long and short sides of the market for a stock, outrageous volatility is sure to ensue.

If you're lucky enough to have owned shares of Beyond Meat ( BYND -5.69% ) since its first-day close on May 2 -- at $65.75 a share -- you're sitting on a 158% gain as of this writing.

Impressive? No doubt. Surprising? Not even a little.

The action in Beyond Meat stock has exactly zero to do with the true worth of the company, and everything to do with supply and demand.

A Beyond Burger with cheese, with burgers in grocery-store packaging set behind it

The Beyond Burger is a stock-market sensation ... for now. Image source: Beyond Meat.

A tale of two charts

We've seen this story before. Take a look at the chart for medical cannabis provider Tilray ( TLRY ). From its first-day close on July 19, 2018, to Sept. 19, 2018, the stock shot up over 850% -- from $22.39 per share to $214.06 per share, nearly a 10-bagger -- as trading volume bounced around like a rubber handball. The stock made huge moves as traders vied with computers to get a piece of the action.

TLRY Total Return Price Chart

TLRY Total Return Price data by YCharts.

As the chart shows, on Sept. 19, Tilray stock briefly went over $300 per share on news that U.S. regulators had approved importing cannabis for medical study. Trading volume jumped to a record of 31.7 million shares as the hysteria peaked; as of this writing, it's fallen sharply to between 500,000 and 2 million daily shares traded. Naturally, the stock price fell sharply in response, and now is just under $46 per share -- a price that first-day investors should still be quite happy with, since it doubles their initial investment.

I expect Beyond Meat stock to follow a similar pattern.

Why? Look at the chart. Don't look at the price action, look at the volume line. Just as Tilray soared as demand for its stock grew, so too has Beyond Meat. But now volume is falling and the stock price is still rising modestly, reminiscent of the action in Tilray stock in October of last year. Tilray's stock nose-dived as demand dried up, and it's probably a matter of no more than two months before Beyond Meat stock suffers the same fate.

BYND Total Return Price Chart

BYND Total Return Price data by YCharts.

Patterns in the math

I'm not talking about chart-reading here; that brand of stock market voodoo purports to predict how stocks will move based on how they've moved previously. What I'm asking you to do instead is to look at how history treats stocks that become unpopular after being wildly popular.

In the case of Tilray, which has about 14.1 million shares available for the public to trade, there were days last summer when the stock traded so fast that over 100% of available float changed hands within a matter of hours. Beyond Meat has more shares available to trade -- 38.2 million as of this writing. Yet volume has surpassed 13 million shares -- over 33% of those available -- in 13 of 47 trading days so far. Is it any wonder the stock has pushed for new highs?

The Foolish bottom line

Trading volume is now solidly back in the single digits, and slowing. The rational response to that trend is for Beyond Meat stock to fall to a more reasonable price based on business fundamentals. I'm watching and waiting for it as a potential buying opportunity, and I suggest you do the same.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Beyond Meat Stock Quote
Beyond Meat
BYND
$66.26 (-5.69%) $-4.00
Tilray Stock Quote
Tilray
TLRY

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