Sleep Easy With Bed, Bath, and Beyond Puts
January 4, 2008 11:36 am SmartGuyAB Picks- Buy Feb. ‘08 BBBY puts around $4.50
Lately, we have been trying out a short strategy to capitalize on the dour market climate. We noticed that stocks in weak sectors were following a pattern: they would announce poor earnings guidance, the stock would tank on the news, and the shares would then continue to trail 10%-20% lower in the ensuing weeks due to no potential positive catalysts in sight. We have profited from this in our personal portfolios with WB, RT, and TLB.
Last night, a perfect candidate emerged for our first official SmartGuyStocks pick to capitalize on this trend. Bed Bath & Beyond (NASDAQ: BBBY), the source of all those omnipresent blue and white coupons, announced lower third-quarter and full-year guidance due to a poor consumer environment and housing market. Earnings for the upcoming quarter are expected to come in 15%-20% below last year.
According to a UBS analyst, “An increasingly challenging macro/competitive environment is having a more pronounced impact upon the company. We don’t expect the pressures that currently weigh upon [Bed Bath & Beyond] to abate quickly.”
BBBY said that margin is shrinking due to “increased coupon redemptions.” The easy availability of the company’s 20% off coupons has reached a point where nobody I know will buy an item at the store without using a coupon. My local store recently lifted its cap on 5 coupons per visit, and a cashier told me that about 80% of purchases are made with coupons, a number that is only increasing.
Like other stores in this difficult environment, BBBY is becoming increasingly desperate to get customers in the door. With a relatively high P/S of 1.05 for a retail store, its high profits are the only thing propping up its share price. As margin and profits sink, expect the share price to tumble. We look for this stock to sink to the 23-24 range in the near-term, and are buying puts to fully capitalize on this move.
January 8th, 2008 at 5:35 pm
Motley Fool is out with a buy call on BBBY, noting in so many words that the stock is now “too cheap.”
This is not compelling logic in a nervous market for a stock that has falling sales, earnings, and resides in one of the most out-of-favor industries. This is akin to an article in the recent business week of an analyst recommending WB at 40 because it is “so cheap.” Needless to say, that thesis didn’t quite work- the stock is now testing 34.50.
“Too cheap” alone only works in a bull market. In a market such as this, you need another catalyst….