Bed Bath & Beyond's (NASDAQ:BBBY) Short Squeeze may be Risky, but the New Business Model has a Chance

Summary:

• Experienced traders have the advantage when maneuvering a possible short squeeze. This can also work for retail investors that have a plan.
• BBBY changed the business strategy in 2019 to importing off label products and selling them as their brand - Inflation is boosting this approach.
• Insiders have bought the stock, but BBBY is still in a risky financial position with more debt than equity. 

It seems that most of the bad performance of Bed Bath & Beyond ( NASDAQ:BBBY ) is attributable to the negative performance history after 2019. The stock is beaten down by short-selling, with some 35% of shares being shorted by July 14th, 2022, and analysts are also posting low price targets for the stock which has driven it to a multi-year low valuation.

However, a change in their business model may improve future margins and there may be fundamental potential for the stock - which is what we will explore in this analysis.

This stock is extremely risky and is currently in the spotlight of speculators, so make sure you do your own due diligence, as we will not be discussing most of the negatives or possible trading strategy in this article.

For example, a major risk for the company is its outstanding $1.38b in debt, while market equity is at $650m. This may cause liquidity issues, as the company has negative cash from operations at $-337m in the last 12 months. Investors that are bullish on BBBY need to believe that the company has a path to overcoming these and other difficulties in the years ahead.

Shorting a Beaten Down Stock

It seems that BBBY has been heavily shorted in the past - which is a bet on the decline in the stock's price. Shorting is extremely risky, and shorts are the most lucrative if initiated when a stock has a high price level. This is when sentiment still seems bullish and short premiums are low, leading to high gains if the trader makes the right call. Today however, BBBY is close to a 2022 low, which means that the 35% shorted stock may have much less to gain, vs those that initiated shorts in January 2022.

This is important because both the short sellers and speculators hoping for a squeeze may get less than they hoped for from a possible jump in volatility. Experienced traders from both sides know this and the only way to magnify squeeze gains is to get new investors on-board with buying and holding the stock - So, if you are a trader, make sure you know exactly why you are buying, there is no "us" and morality in the market.

Insiders are Buying Bed Bath & Beyond

The first part of the positive case for BBBY starts from insider transactions. There are broadly two possible reasons why insiders may be buying their own stock:

1. They feel there is long term potential in their business, which the market is mispricing.
2. They want to signal to the public that they believe in their business.

Finding companies where insider buying is persistent and done by multiple people is a better (but not certain) indicator that insiders believe that they are seeing something which the market has missed.

In the case of BBBY, this is mostly what we see - continuous buying in the last 12 months from different insiders :

View our latest analysis for Bed Bath & Beyond

Bed Bath & Beyond is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

The increase in insider buying may indicate that people familiar with the business still expect to see a turn-around and a fundamental recovery. Here is the business model change they are hopeful on:

Bed Bath & Beyond's New Business Model

Bed Bath & Beyond has some 1000 stores that have changed their strategy from selling their own merchandise to importing low-cost off label brands and selling them as their own brand at a higher margin . This change in strategy was initiated in 2019 and managed to cut costs, however it did drive away some customers which were expecting the established higher quality.

The potential of this new business approach started to show when inflation started increasing in the retail sector a few months ago. When high inflation hits an economy, consumers shift their preferences from premium to affordable, giving BBBY an influx of new consumers . This is slowly revitalizing the company, and analysts are monitoring to see if the new approach is sustainable. BBBY is hoping to increase sales by offering products that can be inspected in-store, otherwise, cheaper online retailers may move in and diminish profitability. 

The company also cut dividends and lowered employee count from 62k in 2019 to 32k in 2022 . While initially this seems like a negative signal, cutting costs and maintaining the profitable stores in a business may actually position the company to increase cash flows and to cater to their product's market capacity. While the business is still indeed in a rough shape, this implies that it is now better managed and that the company can find its balance in the market.

Conclusion

Bed Bath & Beyond is currently in the center of a clash between short sellers, speculators and retail investors. While there is a possibility for a recovery via the changing business model and extensive cost cuts, it is likely that the stock will be highly volatile in the short-term and newer investors may want to be well-informed about the risks before adopting a trading/investment strategy.

For the purposes of this article, insiders are those individuals who report their transactions to the relevant regulatory body. We currently account for open market transactions and private dispositions, but not derivative transactions.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.