Shares of Beyond Meat (BYND 0.95%) jumped as much as 12.6% early Wednesday, then settled to trade up around 6.7% as of 2:30 p.m. ET despite a lack of company-specific news.
As one of the most highly shorted stocks on the market, however, it seems likely Beyond Meat is benefiting from a potential short squeeze as bearish investors scramble to close their short positions in many beaten-down stocks.
Why lower inflation is great for Beyond Meat
Late yesterday, Chris Murphy, co-head of derivatives strategy at Susquehanna, singled out Beyond Meat as one of the market's most-shorted stocks, with an exceptionally high 43.1% of its entire float -- that is, its shares available for trading -- currently being sold short by traders betting against the stock. But that percentage has also declined slightly over the past couple of weeks, from just under 44% at the end of October, indicating some short sellers may have already begun to (or at the very least are preparing to) close their positions.
As highly shorted stocks begin to rally, bearish traders tend to flee for the exits in an attempt to cover their short trades (effectively repurchasing the shares that were borrowed for the purposes of the short trade).
Indeed, Beyond Meat stock did rally nicely last week, even after it announced quarterly results that fell short of Wall Street's expectations. Investors appeared to be cheering a cost-savings plan simultaneously unveiled by the company.
Earlier this week, the broader market also rallied hard after the latest Consumer Price Index report showed inflation has continued to moderate at a faster pace than expected. Many investors are taking this data to imply that we could soon see macro-related pressures on consumer spending begin to abate. This would be great news for companies like Beyond Meat, which rely in part on consumers' willingness to accept the premium prices of its meat-alternatives products.
What's next for Beyond Meat stock?
But there are no guarantees this pop will prove sustainable.
"There's panic to cover shorts alongside this move," Murphy added. "Once those shorts have mostly been covered, then it may be a sign that a rally will peter out."
That said, until Beyond Meat's underlying business shows more tangible signs of a return to sustained, profitable growth, there could be little preventing such traders from simply reopening their short positions in an attempt to capitalize on any resumed downward trajectory. For now, that's why I'm content watching Beyond Meat's story play out from the sidelines.
