Why Baillie Gifford backs Peloton and Beyond Meat despite 80% crashes

The growth stocks are facing ‘operational glitches’ but still feature in Baillie Gifford Positive Change and Keystone Positive Change investment trust.

Baillie Gifford is known for finding underappreciated “growth” stocks early and holding on for dear life as they grow.

But its patience is surely being tested in two high-profile faltering investments: connected exercise bike firm Peloton and plant-based meat company Beyond Meat.

Baillie Gifford Positive Change, the £2.5 billion fund launched five years ago, owns both the struggling stocks despite them fighting “operational glitches”, according to fund manager Kate Fox.

Peloton shares have fallen 85% since their peak in December 2020, while Beyond Meat shares are down 81% from their peak in July 2019. Both investments have stayed in the fund during their downward spirals and contributed to a 20% fall in the fund’s value since November.

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They are outside the top 10 holdings in Positive Change. The duo comprise 0.6% and 0.8% of the Keystone Positive Change investment trust, a sister strategy managed by the same team.

Investor interest in Peloton surged in the early stages of the pandemic as demand soared for its £1,550 bike when gyms shut. However, it failed to maintain profits when economies reopened.

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Beyond Meat is also a victim of investor exuberance that got ahead of reality. Losses are growing and revenue has never taken off. Sales grew just 12% between 2020 and 2021.

Fox, speaking to investors at a strategy update, said she appreciated that short-term performance of the fund could be unsettling, especially for new investors.

She said: “There are a small number of companies in the portfolio that have hit operational glitches. Peloton management has made some big and poor decisions. It over-invested throughout the pandemic and reduced the price of the bike when there were supply change shortages and cost increases. However, it has a new management team now.

“Beyond Meat had operational glitches like Peloton. Growth did de-accelerate due to external factors like Covid. It has been focusing on building up partnerships with McDonald's and KFC, but also now looking to selling more to retail customers. We remain excited about potential growing market and [the] brand they have.”

On Peloton, Fox also faced doubts from investors that it was a stock with a positive impact on the world. Every company in the fund must deliver positive change in one of four areas: social inclusion and education, environment and resource needs, healthcare and quality of life, and addressing the needs of the world's poorest populations.

Fox argued that Peloton was helping people exercise more. She said: “The hypothesis is that it is lowering friction to do exercise, helping lower the onset of health-related diseases that exercise can help prevent.

“At the moment, the bikes are for higher-income households. Longer term, they could unlock a greater part of the market as costs come down.”

Ewan Lovett-Turner, head of investment companies research at stockbroker Numis, likes Keystone Positive Change and notes that the portfolio has become cheaper relative to profits as share prices have fallen. He thinks that it is now good value. The trust is trading on a discount of 8.6%.

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Lovett-Turner said: “Growth companies often trade at elevated valuations, but the Keystone portfolio currently trades on a trailing price-to-earnings ratio of 24.2x compared to an average of 44.2x and a peak of 56.8x since Baillie Gifford took over running it last year.

“Currently this is broadly comparable to the 17.2x for the MSCI AC World Index, while the growth of the portfolio has been considerably stronger than its benchmark over the last five years. Profit margins also materially exceed that of the benchmark, while companies are also less geared.”

He said this therefore made it an “attractive opportunity” to invest in an earnings generative, high-growth portfolio at uncharacteristically low valuations.

Lovett-Turner added that the portfolio was full of long-term growth prospects but that did not mean the portfolio was focused on “blue-sky”, loss-making companies.

He said: “In fact, of the 35 listed companies in the portfolio only nine currently have negative earnings, which accounts for just 12% of the portfolio.”

Since launch in January 2017, Positive Change has returned 233%, more than three times the return from a global tracker fund. It is a member of interactive investor’s ACE 40 list of recommended ethical funds.