Beyond meat, oxen got what they wanted, and bears could be slaughtered

One of Wall Street's biggest concerns for Beyond Meat Inc.'s stock is that current valuations limit potential gains, but the odds are now "very high". for the problem to be solved soon, ironically, by the bears.

Beyond Meat investors got what they expected on Thursday, when McDonald's Corp. said they will begin testing a burger in Canada with a Beyond Meat-made, plant-based patty later this month. That sent the stock

BYND, + 11.58%

which rose 1[ads1]2% on heavy volume in the afternoon trade.

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Jefferies analyst Kevin Grundy said that this partnership has the potential to significantly increase Beyond Meats (BYND) sales if it is eventually rolled out over the testing phase of McDonald's 38,000 restaurants worldwide.

Grundy said if Beyond Meat's patties passed the test, and they ultimately make up 1% to 6% of McDonald's beef volume in the United States, it could add anywhere from $ 50 million to $ 285 million to Beyond Meat's annual sales.

While McDonald & # 39; s

MCD, -0.01%

announcement "is what bulls have been waiting for," Grundy said he cannot recommend buying the stock as valuation keeps him on the sidelines. He repeated the stock valuation he had in stock since he began coverage, keeping his stock price target of $ 152, which is nearly 2% below today's level.

D.A. Davidson's Brian Holland wrote in a recent note to clients that a move beyond Meat-McDonald's announcement would not change his bearish view of the stock. His concern that valuations overestimate the total addressable market for plant-based meat was what made him rank the stock underperforming, at a price of $ 130. stock, two is bullish and two is bearish. The average price target of $ 150.70 is 2.7% below today's level.

Although valuations may already be relatively high, that does not mean that the stock cannot continue to rally – much.

Ihor Dusaniwsky, CEO of predictive analytics at financial analysis firm S3 Partners, said "there is a good chance that there will be millions of shares of short sellers covering their positions and leading BYND's share price even higher."

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He said that short-term interest rates, or bearish stakes on Beyond Meat, as a percentage of float – stocks available for trading – are about 41.6%. Which dwarfed the second-shortest stock in the food and meat sector, saw short interest rates as a percentage of the float for Hormel Foods Corp.

HRL, + 0.55%

was 13.9% and for Campbell Soup Co.

CPB, + 0.30%

is 11.6%, according to S3 data.

Meanwhile, the cost of borrowing the Beyond Meat stock so that it can be sold short, was the highest for any stock in the world with more than $ 50 million short interest, Dusaniwsky said, even before Thursday's rally.

The loan fee on existing Beyond Meat shorts was 141.1% annually through Wednesday. The second highest was 73.4% for Zoom Video Communications Inc. shares

ZM, + 0.19% ,

followed by 70.4% for PagerDuty Inc. shares

PD, + 4.05%

and 66.4% for Tilray Inc.'s share

TLRY, + 0.41% .

The loan rates for the shares in Hormel and Campbell were 0.3%.

So even though card sellers had $ 164 million in profits from September through Wednesday, they had to pay $ 68 million in loan costs to have these shorts, S3 data showed. And with the stock increasing on Thursday, short sellers suffering a market loss of an estimated $ 81 million a day, and an estimated $ 731.6 million this year.

The stock has risen 135% since closing at $ 65.75 on its first day of trading May 2. In comparison, the Renaissance IPO exchange has changed funds

IPO, -0.79%

has lost 7.5% and the S&P 500 index

SPX, -0.24%

achieved 2.2% in the same time frame.

The reason for the high cost of borrowing is the supply, since virtually all of the loanable loans have already been lent, Sa Dusaniwsky said. And as these prices continue to rise, loan fees on many 1,000 to 25,000 shares were between 300% and 400% by early Thursday.

However, among the biggest concerns for bears is not that loanable stocks are scarce, it's that the recall begins. Initially, bulls that own stock available for lending have started to make a profit, which means the stock bears borrowed to shorten them must be returned, which requires them to cover the shorts faster than they would like.

"[W] with market-to-market losses, stock loan rates accelerating to the upside, and share space hitting the street, the likelihood of a short squeeze is very high," Dusaniwsky wrote in a research note. "If BYND's stock price continues this upward path, this will be a & # 39; Whopper & # 39; of a short squeeze."

Valuation wasn't Wall Street's only concern for Beyond Meat

Valuation may have been one of the biggest concerns for Beyond Meat investors, but it wasn't the only one.

Another was the company's ability to meet demand. While the company said in its latest quarterly filing with the Securities and Exchange Commission that it has "significantly expanded" production capacity, "we may experience a production backlog in relation to customer demand if growth rates exceed our expectations."

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Jefferies & # 39; Grundy helped voice that concern when he said one of the reasons McDonald's was partnering. with Beyond Meat, the company is the "strong capacity and production capability needed to meet demand from [McDonald’s] if the test run is successful and stimulates a nationwide rollout."

Another concern is that Beyond Meat does not pass McDonald's test, according to Restaurant Brands International Inc.'s

QSR, -0.73%

Tim Hortons recently allowed the limited offer of Beyond Meat burgers to lapse in some of the restaurants.

But JP Morgan's Ken Goldman recently noted that Beyond Meat's breakfast sausages were extended to most of Tim Hortons throughout the year. "Given that Tim Horton is largely a breakfast [quick service restaurant] – lunch is a much smaller part of the company's menu – the news of the sausage expansion is incrementally positive, and at least partially offsets the burger news," Goldman wrote in a note to customers.

Goldman is one of the two Beyond Meat bulls as he considers the stock overweight with a $ 189 price target.