Diamond Hands vs. Paper Hands: Beyond Meat Stock

The Beyond Meat (NASDAQ: BYND) saga seems to be over for now.

The plant-based meat stock became the latest meme stock in October when it surged nearly 1,400% in less than a week as it converted $1.1 billion in debt into 316 million shares, increasing shares outstanding by nearly five times.

That injected a ton of liquidity into the stock at the same time as an argument spread across social media sites like Reddit and X that the stock was heavily shorted. As a result, trading volume spiked in the stock, and shares soared, peaking on Oct. 22. The stock then lost 79% over the remainder of the month, falling in nearly every session to close down at $1.65.

Image source: Beyond Meat.

Did paper hands beat diamond hands?

The phrase "diamond hands" gained popularity on Reddit's Wall Street Bets page during the epic GameStop short squeeze that kicked off the meme stock phenomenon.

Diamond hands means not selling a stock, holding onto it whatever happens. The group of traders that pumped up GameStop saw having diamond hands as key to the success of their strategy. Holding the stock made it harder for short sellers to buy it back and helped push the stock higher.

"Paper hands" is the opposite of diamond hands. It refers to traders who get nervous when a stock starts to fall and sell it. It's an insult to be called paper hands.

This narrative makes sense in some ways. Stock prices follow the same supply and demand laws that any other economic system does. The price will adjust to the point where supply and demand match.

However, the facts don't bear that out. Typically, during these meme stock rallies, trading volume skyrockets. Beyond Meat stock, for example, saw its trading volume soar when the stock jumped in October, peaking at 2.22 billion shares on Oct. 22, the day the stock peaked. At that trading volume, each share was changing hands more than five times on average. In other words, while some trades might have had diamond hands, the vast majority were paper hands looking to make a quick profit. That pattern has been true of previous meme stocks like GameStop, AMC Entertainment, and, this summer, Opendoor Technologies.

When diamond hands works

Diamond hands can work as a strategy, i.e., holding a stock long term, but not for meme stocks.

Meme stocks are typically well-known consumer brands that are struggling financially. GameStop, AMC Entertainment, and Beyond Meat all fall into this category.

Their fundamentals are poor, and investors choose to pump the stock for reasons like a high short interest, a major investor backing the stock, or another narrative that attracts meme traders. Because the fundamentals are poor, these stocks are generally unable to sustain their rallies and maintain an elevated stock price.

On the other hand, diamond hands is an excellent strategy with fundamentally strong growth stocks. Almost any stock will experience sharp drawdowns, and holding rather than selling is one of the best ways to build wealth in the stock market.

Nvidia, for example, has been one of the best-performing stocks of the last decade, but holding through multiple pullbacks required diamond hands.

NVDA data by YCharts.

As you can see, the stock fell by more than 50% twice in the last ten years, and earlier this year, it fell by roughly 35%.

It would have been easy to sell during any of those crashes, but you would have missed out on the massive gains that followed.

For investors trading tips on sites like Wall Street Bets, the lesson isn't that diamond hands is the wrong approach. It's that it needs to be applied to quality stocks, rather than the likes of Beyond Meat.

After all, Beyond Meat is an unprofitable company with declining sales and a broken business model. It's not worthy of diamond hands.

Jeremy Bowman has positions in Nvidia. The Motley Fool has positions in and recommends Beyond Meat and Nvidia. The Motley Fool has a disclosure policy.