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ITPM Flash EP54 Introduction:
In today’s volatile market, there are plenty of opportunities, but knowing where to look can make all the difference. Ben explains, As we navigate this stock pickers' market, where individual stocks can move more unpredictably, tail risk trades have emerged as a powerful strategy. This involves taking a limited risk for potentially significant returns, particularly in stocks that are highly volatile. In this post, we’ll explore two such opportunities: Beyond Meat (BYND) and Rocket Companies (RKT).
A Market Overview: Shifting Toward Defensive Stocks
First off, let’s get a lay of the land. After a market correction in August, especially in sectors like semiconductors, we’ve seen a noticeable shift in investor focus. Many are moving away from high-growth, high-risk stocks and turning toward companies with strong fundamentals and lower valuations. Think of this as a defensive rotation — investors are seeking safety in solid, reliable businesses.
While the economy is still holding on despite some signs of weakness, the upcoming elections and the Federal Open Market Committee (FOMC) meeting about interest rates could serve as key catalysts. We may see some volatility on the horizon, but for now, the market seems content to move sideways. This brings us to what’s known as a “stock pickers’ market,” where finding the right individual stocks to invest in is crucial.
What Are Tail Risk Trades?
Tail risk trades are essentially bets on extreme events — stock movements that deviate significantly from the norm. These trades typically focus on stocks with a higher-than-usual implied volatility, making it possible to achieve outsized returns. By using options, specifically buying puts or calls, you limit your risk but expose yourself to the possibility of larger rewards. The two stocks we’ll discuss today both fit into this category.
1. Beyond Meat (BYND): A Struggling Stock with Tail Risk Potential
The Basics of Beyond Meat
Beyond Meat, the company known for its plant-based meat products, has been on a downward spiral for some time. The stock has seen progressively lower highs and lower lows, which isn’t great from a technical perspective. It’s also important to note that Beyond Meat's earnings continue to disappoint — ben identifies that the company is bleeding money, and its forward-looking growth prospects are dim.
Digging Into the Financials
Beyond Meat’s price-to-sales ratio, while not terrible at 1.2, still raises concerns. Ben explains that the company’s balance sheet looks decent at first glance, with a current ratio of 3.8 and a quick ratio of over 2. However, a closer look reveals that a significant portion of their assets are tied up in inventory. This is problematic because inventory doesn’t move quickly, and cash flow is key for a business in trouble.
Worse yet, the company has over a billion dollars in principal debt coming due in two years and no clear way to pay it. Add in a 40% short interest, and Beyond Meat is a prime candidate for either a sharp short squeeze or a deeper dive into penny stock territory.
The Trade Idea: Betting on a Breakdown
So, how do we play this? Ben explains, this is where the concept of tail risk trading comes in. Instead of shorting the stock outright, which can be risky with highly volatile stocks, the smarter move is to look at put options.
With Beyond Meat’s earnings report coming on November 8th, that could serve as the catalyst for a big move. Unless the company finds emergency funding or becomes an acquisition target, the path forward looks rocky.
2. Rocket Companies (RKT): A Long Play on Tail Risk
Who Is Rocket Companies?
Rocket Companies is a digitally focused lender specializing in mortgages, but they’ve also expanded into personal and car loans. What makes them particularly intriguing is their AI-driven customer service model, which powers 70% of their service calls. While the housing market has been sluggish, Rocket Companies managed to beat earnings expectations last quarter, showing a 25% increase in revenue.
Why This Could Be a Tail Risk Play
Given that Rocket Companies operates in the lending sector, Ben believes upcoming interest rate cuts could provide a strong tailwind for this stock. With the possibility of lower mortgage rates on the horizon, the company might see increased demand for loans, driving stock prices higher.
Final Thoughts: Is Tail Risk Trading for You?
Tail risk trades aren’t for the faint of heart. They involve taking a higher-than-normal risk, but the reward potential is equally high. For those with a well-balanced portfolio like that taught in ITPM, allocating a small percentage of capital to these types of trades can be a smart way to diversify and potentially boost overall returns.
If you're ready to dive into tail risk trades, keep your eye on key catalysts like earnings reports, interest rate changes, and broader market movements. As we head into the last quarter of the year, opportunities abound — you just need to know where to look!
Disclaimer:
The information provided in this article is for general informational purposes only. It is not intended to be financial advice and should not be construed as such. Always consult with a qualified financial advisor before making any investment decisions. The author and publisher are not liable for any financial losses or damages that may result from the use of this information.
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