stocks

Beyond Expense Meant You Should Have Looked Beyond Meat

Beyond Meat is a perfect example that price matters. Weeks after it IPO’d it was at $240/share. I told people it was too expensive. And yet I got endlessly mocked. Well, 3 years later, it’s given you a nothing burger.

In July 2019, Beyond Meat IPO’d. It had $87 million in sales. It had the best technology. It was amazing blah blah blah. They were going to partner with McDonald’s, and Burger King, and In n Out Burger, and Aliens, and Bitcoin and whatever else the fans could come up with.

But there was just one problem. Beyond Meat is just another food supplier … and a meat substitute. There isn’t any “new” market for their product. They would just replace real meat or maybe some raw veges instead.

Yet, the value of this company was close to $16 billion! Yes that is **184** times sales. It was worth almost as much as Hormel, which had close to $10 billion in sales.

So over the next 3 years, Beyond Meat is down 50% while Hormel is flat even those its sales are up 400% and Hormel’s sales are flat. It doesn’t matter. People realize now it’s just another “meat” supplier.

The reason I say this is many people are excited about many stocks these days that are insanely expensive. Tesla is one of them. Be careful… price matters.

By Christopher Schwarz, ago

War of the (Interest Rate) Worlds

Last week I posted about demographics and rates. Why is this so important? Financial markets and correlations are COMPLETELY different in rising and falling rate environments.

Below I graph the rolling 20-year S&P 500 total returns and a 50/50 bond portfolio of treasuries and investment grade corporates.

Four important takeaways:

  • During rising rates, bonds greatly underperform as their income is offset by capital losses due to rising yields. Stocks can do well if they can pass inflation along to consumers. Thus a pretty negative correlation between rolling returns.
  • During falling rates, bonds get a boost to their income from capital gains. Lower rates make stocks look relatively better which also pushes their prices up. Thus, the very positive correlation between returns.
  • Because of these two points, the “classic” 60/40 portfolio works well during falling yields. You get the diversification of bonds but don’t get up much return.
  • Finally, and perhaps most importantly, you can see rolling rates of returns are declining. This goes back to the excess capital comments from last week. We have tons of capital. Returns will continue to decline over time as our population gets older.
By Christopher Schwarz, ago