Stocks to sell

Tattooed Chef (NASDAQ:TTCF) stock added almost 50% between the middle of August and September, but it is starting to fade.

Source: Olena Yakobchuk/ShutterStock.com

The company has a compelling bull case at this point, but TTCF stock trades at a valuation that is a tad too high.

Tattooed Chef is a fast-growing plant-based food company that is tapping into healthy eating trends.

It went public via a special purpose acquisition company last year, and the market has reacted strongly to the stock since then.

TTCF stock has had a negative run since the beginning of the year. It has lost over 13% of its value since January. Despite the loss of momentum in the past few months, the stock still trades at over seven times forward sales.

However, the company has a lot of potential if it can tap into the growing consumer appetite for plant-based food.

For now, though, I’ll be sitting on the sidelines with TTCF stock until a significant price correction.

The Rise of Plant-Based Diets

While initially a relatively small niche, plant-based diets have become increasingly mainstream as a result of their health and environmental benefits.

Additionally, factors such as animal welfare have also been a driving force for the shift in consumer attitudes.

Arguably the most pertinent of factors is climate change. Research suggests that emissions from plant-based foods are 10 to 50 times lower than those from animal-based products. Hence, to limit global warming, it is imperative to make radical changes in the global diet.

The company is targeting a market set to grow from $29.4 billion in 2020 to $162 billion within the next ten years. Millennials and ‘Gen Z’ are driving the shift in consumer eating patterns.

One of the main competitive advantages for the company is that it is vertically integrated with production facilities in the U.S. and Italy. Therefore, it can effectively tackle a supply-demand imbalance and bring products from concept stages to the shelf in virtually no time.

Tattooed Chef is riding long-term trends which will lead to a structural shift in consumer eating patterns. The massive valuations of its peers are a testament to the amazing potential of the market.

The company can take advantage of these trends through its range of frozen plant-based food and its omnichannel experience to expand sales.

Earnings Performance

A lot was expected from Tattooed Chef after its stellar first-quarter results. Though the results were slightly underwhelming compared to the previous quarter, they showed a strong progression in its top-line growth.

Revenues in the second quarter came in at $50.7 million, a 45.9% growth from the same period last year. However, the revenue came in slightly lower than expected every quarter.

Moreover, the results from branded products were also very similar, with revenues at $33 million, roughly $3 million lower than the previous quarter.

Its clear that the company is moving in the right direction in terms of expanding its sales. Apart from building its online presence, Tattooed Chef is also looking to expand into traditional grocery stores as much as possible. It recently signed up with Kroger (NYSE:KR), where it will supply 12 SKUs in 1,800 of its stores.

Margins are another talking point, which has been quite inconsistent in the past year. They have ranged from 9.2% in the third quarter of 2020 to 27.9% in the first quarter. However, at this point, it is more important for the company to achieve greater brand awareness and strong sales growth.

Final Word on TTCF Stock

TTCF stock has moved sluggishly since the start of the year, but its prior-year gains were enough to make an over-priced offering.

It has the resources and competencies to take advantage of the growing interest in plant-based diets. Revenue growth has been impressive so far, and it will be interesting to see how the company’s progression in the coming months.

Hence, it’s probably wise to wait for a pullback before investing in TTCF stock despite its strengths.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.