If You Like Plant-Based Food Stocks, It’s a Case of Buy This, Not That

On myriad levels, the fundamental backdrop supporting plant-based food stocks really sold itself. As respected institutions such as the Pew Research Center demonstrated, younger generations of Americans (i.e. Millennials and Gen Z) stood out for their climate change activism. Naturally aligning with this principle was the burgeoning non-animal-protein market.

At the most basic level, younger people are more likely to support sustainable and ethically sourced food products. According to data from Statista.com, while only 2.5% of Americans over the age of 50 consider themselves vegetarian, 7.5% of millennials and Gen Z have given up meat.

Moreover, even in the mundane details, plant-based food stocks seem to own an edge with younger age cohorts. As a report from U.C. Davis pointed out, cattle represent the number one “agricultural source of greenhouse gases worldwide. Each year, a single cow will belch about 220 pounds of methane,” which contributes to warming the atmosphere.

By adopting “fake” meat options, consumers can kill two birds with one stone. Primarily, a mass pivot to plant-based proteins will likely reduce the number of animals sent to slaughter. Secondarily, the reduction in animals raised for human consumption should positively impact the environment.

On paper, then, Beyond Meat (BYND) should appeal to investors. Leveraging a compelling and popular brand, the company can help convince more consumers to go vegan (that is, excluding all animal-based food products). While Beyond wins on the narrative front, it’s losing in the business space.

Since the start of this year, BYND stock hemorrhaged nearly 78% of market value. While shares experienced a near-term pop, it does nothing to take away from the red ink. Per data from Google Finance, Beyond’s lifetime return sits at a loss of 78.6%.

BYND Stock Must Overcome a Credibility Crisis

Unfortunately, the crimson stains don’t just center on technical rumblings. On the fundamentals, Beyond continues to frustrate shareholders, causing a mass exodus in BYND stock.

Earlier in November, the plant-based meat specialist released its results for the third quarter. It wasn’t encouraging to say the least. Per Zacks Equity Research, Beyond posted a net loss of $1.60 a share, missing the consensus target calling for a loss of $1.09. In the year-ago quarter, the company posted a loss of 87 cents per share.

On the revenue front, Beyond generated $82.5 million, slipping 22.5% on a year-over-year basis. In addition, this tally conspicuously missed Wall Street’s forecast of $91 million. Per Zacks, “[m]anagement stated that all channels and markets were hurt by softer-than-anticipated demand in the category, and various customer and distributor changes.”

There’s something to be said about contrarians bidding up badly deflated businesses. To paraphrase legendary investor Warren Buffett, “be fearful when others are greedy and greedy when others are fearful.” Certainly, plenty of fear exists over BYND stock but does that mean it’s a buy?

Ultimately, every investor must decide for themselves the risk/reward balance with which they’re comfortable. However, as the quarters go by, it’s becoming increasingly clear that Beyond lacks the economies of scale to mount an effective campaign.

For instance, the company’s gross margin presently sits at 1.5% below parity. Right out of the gate, Beyond lacks pricing power. However, this circumstance becomes compounded with deeply negative operating and net margins.

To be fair, modern consumers will pay a premium for sustainably sourced products. However, a McKinsey & Company survey revealed that “as the premium increases, the willingness to pay melts away. For all but one category (packaging), less than 10 percent of consumers said they would choose green products if the premium rose to 25 percent.”

Not All Plant-Based Food Stocks Are Built the Same

While the framework for BYND appears deeply troubled, not all plant-based food stocks are destined for the trash bin. Those interested in this segment should instead consider blue-chip giant Kellogg (K), which offers the plant-based meat brand Incogmeato.

Though not the most exciting market idea, K stock performed remarkably well this year, gaining over 13% on a year-to-date basis. In contrast, the benchmark S&P 500 index is down 15% during the same period. What’s more, Kellogg provides a mixture of stability and upside growth potential.

Currently, the company offers a forward yield of 3.22%. That’s significantly higher than the consumer staples sector’s average yield of 1.89%. To be fair, the payout ratio stands a bit on the high side at nearly 57%. However, Kellogg enjoys 17 years of consecutive dividend increases. It’s a status that management will likely not give up without a serious fight.

Perhaps most importantly, Kellogg features a high-quality business with a return on equity of 38.5%. Its gross margin pings at 30%, whereas its operating and net margins are 11% and 10%, respectively. In other words, Kellogg enjoys greater flexibility when it comes to economies of scale.

Certainly, K stock isn’t the most exciting name out there. But when it comes to plant-based food stocks, it’s actually been getting the job done.

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