Case Study on Bed Bath and Beyond (BBBY) with Nobias technology
Bed Bath and Beyond (BBBY) has been in the financial news lately due to extremely volatile momentum, in both bullish and bearish directions, in recent weeks. Since late July, BBBY shares have traded from approximately $5.00 up to more than $28.00 and then back down to the $10.00 level where they trade today. Authors and analysts alike are describing BBBY as the latest “meme” stock due to the retail interest that is driving the momentum behind shares.
Bed Bath and Beyond is another short-squeeze story which involves Ryan Cohen, who is the chairman of Gamestop Corp. (GME), probably the most famous “meme” stock. When news broke that Cohen made a bullish trade on BBBY months ago, the shares rallied. And then, in recent days, when filings showed that Cohen took profits on his position, BBBY shares cratered.
Jesse Pound, a Nobias 4-star rated author, touched upon the stock’s recent weakness in a CNBC article, stating that, “Shares of the stock fell 42% in morning trading Friday, adding to a loss of nearly 20% during Thursday’s regular trading session.”
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Sophie Mellor, a Nobias 5-star rated author, covered BBBY’s recent rally in a Yahoo Finance report this week. She wrote, “Shares in Bed Bath & Beyond surged more than 70% on Tuesday as retail investors on social media flocked to the stock after a filing revealed activist investor Ryan Cohen is holding steady on his bet.”
Mellor continued, “The influx of trading brought the share price up 440% in the past month.” She also noted that this isn’t the first time that this has happened to BBBY shares. Mellor said, “The short squeeze in Bed Bath & Beyond shares mirrors what happened in January 2021, when retail traders rallied the price of the company to $53.90. The January short squeeze was primarily triggered by users of the subreddit r/wallstreetbets, an internet forum on the social news website Reddit.”
Prior to that 2021 rally, BBBY shares were trading in the mid-single digit range. Coming out of the COVID-19 pandemic periods, BBBY shares rallied by more than 1000% from March of 2020 to their 2021 highs. However, by mid-2022, Bed Bath and Beyond shares were once again trading in the mid-single digits, hitting their current 52-week lows of $4.38 in June.
In recent weeks the sentiment surrounding BBBY shares turned positive yet again. Mellor wrote, “Cohen, the founder of online pet goods retailer Chewy and the chairman of GameStop, bought a 10% stake in Bed Bath & Beyond in March this year and also snapped up call options on 1.67 million shares with a strike price ranging from $60 to $80 expiring in January 2023.” She continued, “The filing that triggered the short squeeze revealed Ryan Cohen’s investment fund RC Ventures had maintained his percentage ownership of Bed Bath & Beyond and held on to his bet that the price of shares in the home goods retailer would increase to $80.”
Yet, she notes, this meteoric rise doesn’t appear to be based on the company’s underlying fundamentals. Mellor said, “In the company's latest quarterly earnings report in 2022, Bed Bath & Beyond saw its same-store sales fall 24% and revenue decrease to $1.46 billion. The company also indicated it was drowning in $3.28 billion in debt with only $107 million cash on hand on its balance sheet.”
Just days after BBBY’s 400%+ rise, the shares sold off sharply. An article titled “Cohen Makes Millions on Bed Bath & Beyond as Meme Traders Recoil” co-authored by Nobias 4-star rated author, Anders Melin, explains why. Melin stated, “Billionaire Ryan Cohen pocketed a $68.1 million profit from the sale of his stake in Bed Bath & Beyond Inc., scoring a 56% gain on an investment he held for roughly seven months.” He wrote, “Bed Bath & Beyond shares, which were hammered on Thursday, plunged as much as 43% Friday after Cohen’s exit was disclosed in a regulatory filing. It’s setting up to be a repeat of other meme-stock moments, with the price drop being just as dramatic as its ascent.”
“The worst part for the Reddit crowd,” Melin said, “was Cohen’s very involvement in the stock that fueled their enthusiasm.” Melin continued, “The price at one point this week more than quadrupled from a recent low in July, with at least some pointing to a disclosure that showed the GameStop Corp. chairman still was holding onto his stake, which at that point exceeded 10% of the firm. It included call options that would only be in-the-money if the stock continued to soar.”
Regarding retail investor activity with BBBY shares, Melin said, “A torrent of cash from retail traders pumped up Bed Bath & Beyond’s shares in recent weeks, even with the company’s financial situation deteriorating.” He stated, “They bought $58.2 million of the stock on Wednesday, a day after snapping up a record $73.2 million. Net purchases over three weeks totaled $229.1 million, according to data compiled by Vanda Research.”
Melin highlights the fact that this rally ignored Bed Bath & Beyonds poor balance sheet. He said, “Bed Bath & Beyond’s bonds and loans are already trading at distressed levels. The sharpest drop came after the company announced dismal earnings on June 29, though the debt dropped anew after Cohen’s filing.” He also noted that BBBY recently “hired law firm Kirkland & Ellis to help it address an unmanageable debt load, according to a person with knowledge of the decision.”
Jesse Pound touched upon balance sheet concerns in his report as well. He stated, “Of top concern is that its liquidity could be drying up, and the company must raise new capital in order to stay afloat.” Pound continued, “Bed Bath & Beyond reported roughly $108 million in cash and equivalents in its fiscal first quarter, down from $1.1 billion a year prior.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
On Thursday morning, shortly after the Cohen sale news broke, Howard Smith, a Nobias 4-star rated author, published a piece at The Motley Fool, titled, “Why the Bubble Burst for Bed Bath & Beyond Stock Today”. In his report, Smith touched upon Cohen’s investing activity which likely served as inspiration for BBBY’s recent rally. He said, “The discussion of those call options seemed to be the catalyst for the recent surge in the company's stock price. It's possible that retail traders and others who consider this a meme stock didn't realize those call options had been purchased months ago, and thought Cohen was making a more current bet. But now Cohen wants to cash in, and it is tanking the stock. “
Smith went on to highlight a recent analyst report published by Seth Basham, a Nobias 5-star rated analyst, writing: “Today, Wedbush analyst Seth Basham issued a downgrade to the equivalent of a sell rating. In a note shared by MarketWatch, he wrote, "More pressing, however, is BBBY's cash burn and the prospects for further financing needed to shore up its balance sheet and rebuild supplier confidence." Basham has a $5 price target on the stock, which would be a drop of more than 78% from Wednesday's closing price.”
Overall, Basham isn’t the only credible analyst that the Nobias algorithm tracks that believes that BBBY shares are irrationally valued. BBBY shares currently trade for $11.07. Right now, the average price target of the 6 credible analysts who cover the company is $4.80/share. This consensus estimate implies downside potential of approximately 59%. Furthermore, the credible authors that the Nobias algorithm tracks share this bearish sentiment. 71% of recent articles published on BBBY stick have expressed a “Bearish” bias.
Disclosure: Nicholas Ward has no BBBY position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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