“The trick is to stop thinking of it as your money.”
― Anonymous IRS Auditor
Our blog portfolio continues to perform well and volatility remains low. Year-To-Date the portfolio is up +18.43%. Our benchmark, the S&P 500 is up a stunning +20.45% YTD and closed at 3,019.
Beyond Meat? Or Beyond Bananas?
Plant based protein products have become all the rage and supplanted cannabis as the next big thing. While you may want Beyond Meat on your dietary menu, I don't think it has any place in your investment menu. I rarely write bear articles, I just ignore the company and move on to better investment opportunities. However, this time I wanted to speak up because I see a greater problem. Beyond Meat appeals to younger investors and others prone to gambling in the stock market. So far investors who got in early on the IPO have made a lot of money and some who entered late have made money; its like watching the high score on a video game climb to the stars. I see pain ahead, the kind of pain that will take a cohort of investors out of the market and sit on the side lines.
On May 2, 2019, Beyond Meat, the maker of plant based protein packaged food products had its initial public offering. The IPO was priced at $25 a share Wednesday evening and immediately began trading at $46 a share and surged to $65.75 by the close, for a gain of 163%. That was back in May.
Overpriced: On Friday July 26th shares closed at $234.90, a 410% increase from the first trades at $46, giving the upstart packaged food company a market cap in excess of $14 billion dollars. If ranked by market cap and not revenues, Beyond Meat is larger than Molson-Coors and would place it as one of the top 50 largest food companies in the U.S. The company had nothing to do with the soaring stock price, this is entirely the result of investors buying while very little selling is taking place. There are actually very few shares to buy right now, a problem I'll discuss later.
Big Losses: While Beyond Meats burgers and stock price look tasty, their losses don't. Beyond Meat has grown its revenue over the years, but hasn't produced a profit. In the first nine months of 2018, revenues were $56.4 million, better than double the $21.1 million in the prior year, and better than the $32.6 million posted for all of 2017. But net losses in the nine-month period were $22.4 million, not much of an improvement over the $23.4 million loss posted in the year-earlier. Losses for 2017 came to $30.4 million, a substantial increase over the $24.1 million loss posted in 2016.
Uncertainty: The worst thing you can give an investor is uncertainty and Beyond Meat has given investors a heaping helping of uncertainty. Let's start with the ingredients. The primary ingredient in Beyond Meat products is pea protein, an extract from yellow peas. Currently the company sources its yellow peas from Canada and France, but has only one supplier for this specialty extract. Beyond Meat doesn't actually make its products. Like many processed foods, the company uses a co-manufacturer to produce the final product you see in the store. The problem is, management has confirmed that they don't have a written contract, or any kind of long term contract at all with their co-manufacturers, CLW Foods and FLP Foods. In the background is an ongoing lawsuit with Don Lee Farms, the original co-manufacturer of Beyond Meat products. Any disruption with their co-manufacturers or the supply chain and Beyond Meat revenues will tumble beyond belief.
Sniff-Sniff: Beyond Meat doesn't pass any of the sniff tests, it isn't profitable, losses are mounting, the supply chain is held together with a handshake, its most important ingredient has to be imported from Canada and France (think trade wars), and competition is already here. What if or when Nestle, Conagra or any of the other large food companies show up in the grocery isle? Will Beyond Meat still be the coolest thing? Will Impossible burger surge ahead? Will tastes shift to plant based fish, plant based pork, chicken or something else? There doesn't seem to be too many barriers to entry.
What To Do: If you own Beyond Meat stock and have a profit, please diversify that investment soon. If you have a loss consider the possibility that a bigger loss would be harder to survive than a smaller one. If you don't own Beyond Meat, I'd recommend staying out and looking for better quality companies.
Pain Day: On October 29, 2019 the lock up period for Beyond Meat restricted shareholders will end and I suspect a lot of those shares will come on the market causing a significant price reduction. This is when we will see the beef, in the form of a stampede to sell shares at the highest price possible. According to the companies S-1, it looks like roughly 49 million shares of the 58,745,544 shares outstanding, or about 83% of the common stock is currently restricted.
Earnings Season Continues
Our portfolio companies continue to report earnings, with Northrup Grumman Corporation up today. So far every company in the portfolio has been a meet or beat in terms of earnings and revenue. Most have provided guidance indicating continued growth.
Northrop Grumman delivered a fantastic quarter which lead me to make the following call "I'm going to hold our shares and will raise our full year price target to $353.
When the year started I had a $342 price target on NOC. On July 24th, Northrup reported earnings and the stock closed at just over $342. I did some quick analysis and decided that $353 looked like a conservative end-of-year price target and raised my estimate. On July 25th the stock closed at $354.72, $12.72 higher than my original $342 call. We might look at this move an say that 'investors' have priced in managements optimistic outlook and there is nothing left. That could be true, but in reality, we don't know everything there is to know about managements plans for the rest of the year, or next year for that matter.
So why do I remain bullish on Northrup Grumman when there are other first rate defense stocks to invest in like Lockheed Martin, Raytheon, General Dynamics and Boeing? With Northrop our portfolio gets access to several great defense contractor because it acts as a sub-contractor on various projects. Northrup is a major subcontractor on Lockheed's F-35 fighter and is also building the Air Force's secretive B-21 stealth bomber. The Air Force recently stated that the B-21 could have its first flight in less than 2 years. Air Force Vice Chief of Staff Gen. Stephen Wilson stated that Northrop is moving pretty fast, with respect to the B-21 project. Best estimates suggest that the first flight would take place in December 2021. Wilson said the Air Force needs "at least 100" B-21s. Analysts have projected that the contract could be valued at up to $80 billion. With more drones being deployed, more efficiency from every dollar and climate change making first-responder logistics more critical, Northrup's technology in all of these spaces will become a greater necessity.
Looking at analysts recommendations, Robert Spingarn of Credit Suisse reiterated his $385 price target, Citi analysts raised their target to $410 and Cai Rumohr at Cowen & Co. placed a HOLD on the stock with a $350 price target. Since Northrup represents less than 1% of the portfolio and our gain is almost 47% with a bright future ahead, I'm inclined to just hold the stock until the end of the year. It's not likely to fall below our cost basis and is more likely to rise up to the $400 level. Regardless of what happens at this point I'm sure we'll be very happy with the end-of-year results.
EXPECTED: Amazon.com, Inc. is estimated to report earnings on 07/25/2019.
The consensus EPS forecast for the quarter is $5.52. Earnings range is range is $4.34 to $6.77.
The consensus revenue forecast for the quarter is $62.46B, Revenue range is $60.97B - $63.76B.
REPORTED: Amazon reported second-quarter earnings of $2.6 billion, or $5.22 a share, up from $5.07 a year ago but lower than analysts’ estimates. Revenue was $63.4 billion, up from $52.9 billion a year ago, with Amazon Web Services cloud-computing accounting for $8.38 billion of that total. Analysts on average expected Amazon to report earnings of $5.56 a share on sales of $62.52 billion, with $8.48 billion credited to AWS. In general analysts were not impressed and the stock took a serious hit. When shares opened on July 25th Amazon was trading at $2,001, by the close on Friday it was at $1,943.05.
I think this is a tremendous buying opportunity for long term investors who want to start a position or who have a cost basis higher than $1,943. We don't get many pull backs of this magnitude in Amazon. The current consensus price target is $2,256, 16% upside from Friday's close.
EXPECTED: Mastercard Incorporated is expected* to report earnings on 07/30/2019 before market open. The report will be for the fiscal Quarter ending Jun 2019.
The consensus EPS forecast for the quarter is $1.83. Earnings range is range is $1.73 to $1.91.
The consensus revenue forecast for the quarter is $4.09B, Revenue range is $4.01B - $4.18B.
EXPECTED: Sony Corp Ord is expected* to report earnings on 07/30/2019 before market open. The report will be for the fiscal Quarter ending Jun 2019.
The consensus EPS forecast for the quarter is $0.78. Earnings range is range is $0.78 to $0.78.
The consensus revenue forecast for the quarter is $18.79B, Revenue range is $18.79B - $18.79B.
EXPECTED: Monolithic Power Systems is estimated to report earnings on 07/24/2019.
The consensus EPS forecast for the quarter is $0.92. Earnings range is range is $0.91 to $0.93.
The consensus revenue forecast for the quarter is $150.68M, Revenue range is $150.16M - $150.7.
EXPECTED: Royal Caribbean Cruises Ltd. is estimated to report earnings on 08/01/2019.
The consensus EPS forecast for the quarter is $2.47. Earnings range is range is $2.34 to $2.53.
The consensus revenue forecast for the quarter is $2.8B, Revenue range is $2.76B - $2.84B.
EXPECTED: Xylem Inc. is expected* to report earnings on 08/01/2019 before market open. The report will be for the fiscal Quarter ending Jun 2019.
The consensus EPS forecast for the quarter is $0.79. Earnings range is range is $0.76 to $0.80.
The consensus revenue forecast for the quarter is $1.35B, Revenue range is $1.32B - $1.40B.
EXPECTED: MiX Telematics Limited is estimated to report earnings on 08/01/2019.
The consensus EPS forecast for the quarter is $0.18. Earnings range is range is $0.18 to $0.18.
The consensus revenue forecast for the quarter is $35.46M, Revenue range is $34.36M - $36.25M.
EXPECTED: American States Water Company is estimated to report earnings on 08/05/2019.
The consensus EPS forecast for the quarter is $0.51. Earnings range is range is $0.50 to $0.53.
The consensus revenue forecast for the quarter is $115.2M, Revenue range is $110.5M - $122.31M.
EXPECTED: Fox Factory is estimated to report earnings on 08/07/2019.
The consensus EPS forecast for the quarter is $0.66. Earnings range is range is $0.65 to $0.67.
The consensus revenue forecast for the quarter is $187.94M, Revenue range is $185.12M - $190.3M.
EXPECTED: Cabot Microelectronics is expected* to report earnings on 08/07/2019 after market close. The report will be for the fiscal Quarter ending Jun 2019.
The consensus EPS forecast for the quarter is $1.57. Earnings range is range is $1.50 to $1.65.
The consensus revenue forecast for the quarter is $267.13M, Revenue range is $263M - $270M.
EXPECTED: Insperity, Inc. is estimated to report earnings on 08/07/2019.
The consensus EPS forecast for the quarter is $0.83. Earnings range is range is $0.83 to $0.84.
The consensus revenue forecast for the quarter is $1.04B, Revenue range is $1.02B - $1.05B.