Was Beyond Meat's Extraordinary 596% Rally the Result of a Short Squeeze?

Beyond Meat's (NASDAQ: BYND) share price had an extraordinary run in the middle of October. During just a few days, spanning Oct. 16 through Oct. 21, the stock leaped from $0.52 to $3.62, based on the closing prices. That's more than a 596% rise.

The company's share price action made the news, but what's behind the sharp movement? Some believe a short squeeze was the major cause.

Image source: Getty Images.

What is a short squeeze?

Some investors and commentators believe the swift stock price surge came about as a result of a short squeeze. That sounds ominous, but it's a simple concept.

Investors can short a stock that they believe will go down in price. Instead of buying low and selling high, short-sellers hope to do the opposite. That is, they borrow stock they don't own and sell the shares. They hope to profit by buying it back at a lower price.

But at some point, short-sellers do have to "cover" their short, or buy back the shares and return them. When there's a big short interest, that buying activity can cause the stock's price to rise over a short period.

Did a short squeeze drive Beyond Meat's stock gain?

Was a short squeeze the main driver of Beyond Meat's short-term stock price surge? It doesn't appear like it was the primary factor.

Short interest, or the number of shares sold short, reached 51.8 million as of Oct. 15. The amount had been climbing over the previous couple of months. The number went from 27.3 million on July 31 to 39.6 million on Sept. 30.

The company did vastly increase its shares outstanding following a debt-for-equity swap. So, the increased count could've given short-sellers more shares to short and alleviated a squeeze.

The main cause of the price rise appears to be social media posts that made Beyond Meat into a meme stock. The shares took off like a rocket for those few days, but they've fallen back to Earth, closing at $1.22 on Nov. 11.

Focus on the fundamentals

Whether a short squeeze factored into the meme-fueled rally or not, those focusing on the long term should stay away from Beyond Meat's shares.

A look at the company's financials shows that its struggles have continued, with revenue continuing to fall. Beyond Meat's third-quarter top line dropped 13.3% to $70.2 million. Its volume sold dropped in the U.S. and internationally.

While short-term price movements are virtually impossible to predict, examining a company's financials can provide long-term investors with valuable insights. In this case, the revenue figures are telling you to avoid the stock.

Lawrence Rothman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Beyond Meat. The Motley Fool has a disclosure policy.