Investing, not speculating

My own approach to buying shares is that of someone who believes in long-term investing. I am not trying to profit from short-term swings in share prices. Instead, I am hoping to buy small slices of great businesses at what I think are attractive prices.

That is different to a lot of speculators and short-term traders who buy meme stocks like Bed Bath & Beyond. Indeed, the student who made a fortune in the stock reportedly only held his shares for a matter of weeks.

As billionaire investor Warren Buffett says, in the short term the market is a voting machine but in the long term it is a voting machine. In theory I could speculate and try to make money on short-term price swings. But that is basically akin to gambling. I think it is more sensible for me to invest on the basis of what I think a company’s long-term business prospects are. Hopefully if I am right, over time a company’s share price will reflect its business success, not just the frenzied trading of speculative hordes.

The Bed Bath & Beyond share price could sink further

On that basis, Bed Bath & Beyond does not attract me as a possible acquisition for my share portfolio.

Historically I think the retailer has had a lot going for it, from strong brand recognition in key cities like New York to benefiting from resilient demand for items such as kitchen accessories. Those attributes could help it in future too. But the pandemic has badly hurt the business, which lost money for the past three years in a row.

A recession could lead to shoppers tightening their belts, hurting sales further. Sales have already recorded four consecutive years of decline. That is not encouraging.

The company’s chief financial officer fell to his death from a Manhattan building last Friday. That tragic incident will further shake already fragile investor confidence in the Bed Bath & Beyond share price. There has been a 66% decline in the Bed Bath & Beyond share price over the past year. I think it could still go lower from here, given the mounting bad news.

My move

I remain upbeat about the demand for household goods. That is why I own shares in UK retailer Dunelm. It operates in a similar part of the market to Bed Bath & Beyond across the pond.

At Bed Bath & Beyond, sales are falling and the company is lossmaking. That is the opposite of the situation at Dunelm. The Bed Bath & Beyond share price is currently bouncing around partly because speculators have been treating it as a meme stock. As a buy-and-hold investor, Bed Bath & Beyond is not the sort of company I want to invest in right now.

The post Can I profit from the Bed Bath & Beyond share price? appeared first on The Motley Fool UK.

Is this a stock I should consider for my own portfolio? Let’s take a look.

Bed Bath & Beyond stock: worth buying?

Looking at the investment case for Bed Bath & Beyond, there are a few things that immediately jump out at me. The first is that the company is really struggling right now.

In its most recent results for the three months ended 28 May, the group posted sales of $1,463m, down 25% year on year. Meanwhile, it posted a net loss of $358m, compared to a loss of $51m a year earlier.

Looking ahead, Wall Street analysts expect the company to record a net loss of $469m for the year ending 26 February 2023. They then expect a net loss of $257m for the following year.

One reason the company is struggling is that it sells discretionary (non-essential) products. And in the current financial environment, consumers are cutting back on these kinds of products.

Short sellers are targeting the stock

The second thing that jumps out here is that short interest is eye-wateringly high. Right now, my data provider shows that around 50.5m Bed Bath & Beyond shares are on loan – representing roughly 63% of the free float. This tells me that a lot of hedge funds and other sophisticated investors expect the stock to fall.

I suspect the short sellers are focusing on the company’s cash burn and risk of bankruptcy. Last quarter, cash flow from operations was -$400m.

Now, highly-shorted stocks can sometimes actually produce explosive returns if there’s a ‘short squeeze’. We’ve seen this in the recent past with GameStop and AMC Entertainment.

However, I’d never buy a stock just because it could potentially see a short squeeze. I prefer to focus on the fundamentals of the business. And if I see a highly-shorted stock, I tend to steer clear because short sellers are some of the smartest minds in the business.

Ryan Cohen sold out

One other thing that’s worth noting here is that entrepreneur and activist investor Ryan Cohen, who invested a large amount in Bed Bath & Beyond shares early in 2022, has recently offloaded his entire stake in the company (generating a profit of around $70m). I don’t know why he sold out of the stock. But he may have been concerned that there was limited share price upside here.

Putting this all together, the stock looks quite risky to me.

My move now

It’s worth pointing out that there are a few positives here. For example yesterday, the company said it had secured more than $500m of new financing. This should help strengthen its balance sheet.

There has also been a bit of insider buying recently. In July, interim CEO Sue Gove invested $230,500 in stock (when it was near $4.60).

However, weighing everything up, my overall impression is that Bed Bath & Beyond is a risky, speculative stock. I think there are better stocks I could buy today.

The post Should I buy Bed Bath & Beyond stock for my portfolio? appeared first on The Motley Fool UK.

An aggressive short squeeze

One of the most prolific cases last week was Bed Bath & Beyond (NASDAQ:BBBY). The US retailer has struggled to perform recently, with the share price down 58% over the past year. In fact, a month ago the share price was hovering around $5.50. There was large short interest, which means that a lot of investors were betting the price would fall further.

However, a large retail buying push caused a sharp price movement higher. With short sellers urgently having to buy back the shares, this propelled the share price even higher still. It topped out around $27 last Wednesday, representing a five-fold return in one month.

Plenty to smile about

SmileDirectClub (NASDAQ:SDC) is another example of a big mover recently. The company specialises in clear aligners and similar dentistry products. Even with the share price being down 66% over the past year, it still commands a market capitalisation of $219m, showing that this isn’t a small penny stock.

Unfortunately, revenue has fallen over the past couple of years, pushing the business into making losses. It’s the same case as Bed, Bath & Beyond, in that long-term investors think that the situation is only going to get worse.

A month ago, shares were trading around $1. It traded up to $2.19 last Tuesday, before coming lower. This return of over 100% was fuelled in part by chat forums and social media, with many jumping on the bandwagon as the price rose.

Risk and reward with meme stocks

I did hear about the move on Bed Bath & Beyond a couple of weeks ago, before it peaked. I decided against investing for a few reasons.

With meme stocks, it’s always a short-term play with a race to the top and then a sharp fall straight afterwards. I simply don’t know if I’m going to buy at the top, and be left holding a heavy loss. For example, on Friday the Bed Bath & Beyond price dropped 40%!

Most of these businesses are struggling financially. So the fundamental value is probably less than the inflated price they’re changing hands at.

There’s obviously a clear reward for people who get it right. Doubling my money in a few weeks is something that no one can turn their noses up at.

My investment philosophy is geared around long-term investing, so ideas with a lifespan of a few days or weeks aren’t really what I’m looking for. I also feel the risk associated with both stocks is too high for my liking. So with the two above examples, I’m happy to sit and watch from the sidelines.

The post 2 meme stocks that are exploding higher in August appeared first on The Motley Fool UK.

What’s going on here?

Bed Bath and Beyond sells a range of merchandise in the home, baby, beauty and wellness markets. It’s one of the largest such businesses in the US.

Like many listed companies, BBBY stock performed well following the March 2020 plunge. Indeed, I would have made multiple times my money if I’d invested as we were sent indoors for the first time and held until late January the following year. At this point, it traded at over $50 a pop.

From here, however, the vast majority of these gains evaporated. At the end of July, BBBY stock changed hands for roughly $5. That’s not really surprising given its awful Q1 update the month before.

Even so, the more recent share price action has been compelling to watch. BBBY rocketed more than 300% in the first two weeks of August before crashing again last week. Some people made an absolute fortune by trading it.

So, is BBBY stock now a screaming buy?

The stock now trades at $11. As tempting as it might be to think that history will repeat itself, I’m not inclined to ‘buy the dip’ here for a couple of reasons.

First, the most recent explosive rise in the share price doesn’t appear to be due to anything that Bed Bath and Beyond is doing as a business. Rather, it was probably due to a short squeeze.

Short squeezes happen when those who are betting that a company’s share price will fall will rush to close their positions. In this case, the catalyst appears to be a buying campaign orchestrated on the popular WallStreetBets (WSB) forum on Reddit. The name probably rings a bell. It was behind the enormous gains seen in meme stocks Gamestop and AMC during the pandemic.

Of course, a sudden jump in any company’s share price is often followed by a period of heavy selling as traders take profits. That’s arguably what we saw here last week, especially after billionaire investor Ryan Cohen sold his 10% stake.

Do I really want to expose myself to that kind of volatility? I don’t think so, at least with money I can’t afford to lose.

Second, I can’t help but think that the tough times will continue for Bed Bath and Beyond. Is there anything I can get at this retailer that I can’t easily obtain elsewhere? Again, I’m not convinced. And it’s this lack of firm competitive edge — or ‘economic moat’ to quote Warren Buffett — that makes me wary.

Not Foolish

As an investor, I’m keen to pick up stock when it trades at a discount to what it’s truly worth. But I don’t just throw my cash at anything, especially when it’s become a plaything for traders. I’m looking for firms generating great margins and high returns on the money (my money) management put to work in the business. Why take a risk here when there are a lot of great British companies doing just this?

I’m reaching for my bargepole.

The post BBBY stock: should I buy the dip? appeared first on The Motley Fool UK.