Shares of food stocks are recovering nicely this week, outpacing the returns of broad market indexes like the S&P 500. Tattooed Chef (NASDAQ:TTCF), Arko (NASDAQ:ARKO), and Oatly Group (NASDAQ:OTLY) were up as much as 18.6%, 16%, and 14.3%, respectively, today since the close last Friday.
Let’s try to figure out why.
Tattooed Chef did not have any news releases this week, so it is unclear why the stock is up so much. The company released its second-quarter earnings report on Aug. 12, with revenue growing 46% to $50.7 million in the period. Gross profit came in at $8 million, giving the start-up consumer packaged goods company a 15.7% gross margin. With a market cap of around $1.7 billion, investors are betting that Tattooed Chef can continue growing revenue at a rapid pace while also expanding its profit margins. Tattooed Chef also has a high short interest of 14%. This can cause wild short-term price movements if short-sellers are forced to buy back the shares lent to them, which could have been the main reason for the wild price swing this week.
Arko runs a boring but steady business: convenience stores. It owns the seventh largest convenience store chain in the United States, with almost 3,000 locations across the country. As with Tattooed Chef, it is unclear why the stock was up so much this week. Nothing has changed for the business except for a small news release announcing a virtual buying day with its suppliers. And with minimal short interest, the move was likely not because of a short squeeze, either. I don’t think shareholders are complaining, but we can probably chalk this one up to macroeconomic-driven movements, factor investing dynamics, or a big investment firm taking a position in Arko. Nothing fundamentally changed about the business this week.
Lastly, we have Oatly, a recent IPO that sells a popular brand of oat milk. Unlike with Arko and Tattooed Chef, there was actually news that drove the stock higher this week. At a conference with Bank of America, Oatly management gave a positive update on its business, saying that demand for oat milk shows no signs of slowing down and that the company’s main goal is to ramp up production. This is good news, but with a market cap north of $10 billion and only $152 million in trailing-12-month gross profit, investors need to expect a ton more growth from this business in order to rationalize this valuation.
Like I said before, even though these three stocks soared this week, not much has actually changed with the businesses. Investors in Arko Group, which is trading at 8 times EBITDA (earnings before interest, taxes, depreciation, and amortization), are likely betting on stability and the stock’s low valuation. Shareholders of Tattooed Chef and Oatly, with their high valuations, need to expect strong revenue growth over the next few years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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