No investor can escape occasionally buying a bad stock. It's painful watching a stock tumble and realizing that it's unlikely to ever recover. Or even worse, doubling or tripling down before throwing in the towel.
In many cases, it's not all that obvious that a stock should be avoided. In some cases, though, it's very clear. Imitation-meat company Beyond Meat (NASDAQ: BYND) and video game retailer GameStop (NYSE: GME) look exceedingly likely to disappoint investors.
Beyond Meat, which makes plant-based products that look like meat, is having a moment. After going public in May at $25 per share, the stock went nuts. It currently trades for around $165 per share, good for a valuation of roughly $10 billion.
The company expects to produce revenue of at least $210 million this year. That guidance puts the forward price-to-sales ratio at nearly 50. That's far higher than many fast-growing software-as-a-service companies. It's pure insanity.
Valuation alone is enough reason to stay far away from Beyond Meat stock. But another reason is the product itself. By any reasonable definition, the company's imitation meat is an ultra-processed food. Its flagship Beyond Burger has nearly 20 ingredients, some of which are themselves heavily processed and not found in supermarkets or in people's kitchens.
This doesn't mean that people won't buy this stuff, but it does mean that any claim that the products are healthier than what they're trying to replace is dubious. Beyond Meat is a story stock, and the story just isn't very compelling.
Competition is also a problem. Already, Tyson Foods has announced a line of plant-based products set to launch this summer under its new Raised & Rooted brand. Initial products will include plant-based nuggets and burger patties made from both real beef and plant-based ingredients. Nestle is also planning to launch its plant-based Awesome Burger this fall in the U.S.
Even if the absolute best-case scenario plays out for the plant-based protein industry, Beyond Meat's valuation is ludicrous. And there's not a word to describe how insane it is otherwise.
It's getting hard to see any path forward for video game retailer GameStop. Its attempt to diversify by selling mobile devices was a dud -- it sold off its Spring Mobile business last year after booking some massive write-offs. GameStop is now left with a core business of selling new and used physical game discs in a world where digital downloads, and perhaps even streaming, are the future of the gaming industry.
The company shattered any confidence in a turnaround earlier this month when it reported its first-quarter results. Though it's still profitable, it eliminated its dividend to save cash. That's not a move you make if you think things are going to start getting better. The company expects comparable-store sales to drop 5% to 10% this year, and it failed to provide any earnings guidance.
GameStop's most important business, used and value video game products, is in free fall. This segment carries a high gross margin and accounted for around 37% of total gross profit during the first quarter. Sales were down more than 20% year over year, continuing a years-long trend. There's no such thing as a used digital game, which means that the lucrative used-game business is eventually going to disappear.
GameStop is starting to look a lot like RadioShack. Even though the stock may seem cheap, don't be fooled. The future looks bleak.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short July 2019 $8 calls on GameStop. The Motley Fool recommends Nestle. The Motley Fool has a disclosure policy.