Two top stocks for Veganuary

He succeeded with this idea before. Now our overseas investing expert thinks it’s time for another bite.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Investors who resolved to eat less meat in the new year could consider putting their money where their mouth is. Competition among manufacturers of plant-based alternatives to meat has increased but then so has the size of the market for their products.

The latest surge in meatless “meat” is a deal under which Kellogg (NYSE:K) will supply sandwich fillings for coffee bars chain Dunkin’ – the Southwest Veggie Power Breakfast could prove quite a mouthful in more ways than one.

Nestle (SIX:NESN) and Unilever (LSE:ULVR) launched rival meatless burger patties late last year, products that together with Kellogg’s popular veggie brand MorningStar Farms could prove a threat to smaller, newer rivals that lack the firepower of a global brand. However, there is surely plenty of scope for specialists to find a lucrative niche.

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Sales of plant-based proteins are set to grow 20% a year for the foreseeable future, possibly taking sales beyond $10 billion by the middle of the decade. Currently the switch from meat is being held up by the high cost of plant-based products, which can be priced at two to three times their meat-based rivals. 

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There are signs that price reductions should narrow that gap substantially, which will lend greater weight to the argument that plant-based products are more environmentally friendly and contain fewer preservatives and other potentially unhealthy additives.

The most popular choice among a limited range of purely plant-based protein producers has probably been Beyond Meat (NASDAQ:BYND), a Californian-based company that makes burgers from plant-based protein. It doesn’t pay a dividend and is unlikely to do so in the foreseeable future, but what it lacks in payouts it makes up for in share price excitement. 

It was floated at $65.75 in May 2019, nearly quadrupled to $235 in less than three months and was back to $80 three months later as realism set in. The stock has since been as low as $58 and back up to a grossly overvalued $195, but at around $120 it is more realistically priced.

Source: interactive investor. Past performance is not a guide to future performance

However, some caution is required. Third-quarter earnings were a serious disappointment as restaurant closures caused by the Covid-19 pandemic more than offset a 39% year-on-year increase in retail sales. Analysts fear that fourth-quarter figures will be equally disappointing and that lower sales may persist into 2021.

Beyond Meat has the benefit of being an early pioneer in a potentially lucrative sector and it will undoubtedly return to overall growth, assuming that various vaccines curb the pandemic. But it could be 2022 before the company turns in a profit, especially as the company has been forced to sell at discounted prices to compete with the larger rivals that have bigger marketing budgets.

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On the positive side, the company struck a deal with McDonald's (NYSE:MCD) in November to supply the fast food chain’s new McPlant burgers. Apart from providing extra sales, the initiative is a big morale boost for Beyond Meat as McDonald’s rarely acknowledges partnerships with other brands.

An alternative, less well known, investment is Tattooed Chef (NASDAQ:TTCF), which has suffered less in the pandemic as it sells through retail outlets. 

Source: interactive investor. Past performance is not a guide to future performance

The shares hovered around $10 for more than two years before shooting up to a peak of $28. They are off their best just above $25.

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Hobson’s choice: Beyond Meat is still nicely up on my buy tip at up to $89 made in November 2019, though investors who got out at the recent peak did really well. I wouldn’t buy above $125 as there is likely to be resistance around that level. More cautious investors may prefer to see if the stock settles back further in the hope of buying at $110 on the way back up. 

Buy Tattooed Chef up to the previous peak of $28.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.