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Bed Bath & Beyond Stock: Another Bloodbath for Short Sellers

BBBY bears have had several weeks of panic. Have short-sellers crossed the line?
  • Bed Bath & Beyond's stock is already up over 310% in the last few weeks.
  • The retailer had been a comfortable target for short sellers, due to its questionable fundamentals.
  • Thanks to Reddit investors, it's getting harder for short sellers to cover their BBBY positions.
Figure 1: Bed Bath & Beyond Stock: Another Bloodbath for Short Sellers

Figure 1: Bed Bath & Beyond Stock: Another Bloodbath for Short Sellers

Read more: BBBY Stock: Did GameStop Chairman Ryan Cohen Anticipate the Rally?

Have Short-Sellers Crossed the Line?

Since July 29, shares of Bed Bath & Beyond  (BBBY) - Get Bed Bath & Beyond Inc. Report have jumped more than 310%. With no business-related reason to justify such an increase, we can chalk it up to meme investors causing a short squeeze.

During the August 16 trading session, there was so much volatility in Bed Bath & Beyond's stock that it triggered three volatility halts.

Shares rose nearly 80% in the morning before losing steam and closing the session up "only" 30%.

Short sellers have been betting against Bed Bath & Beyond because the company reported worse-than-expected results for the last four quarters. This was due to a series of problems affecting its supply chain, inventory and cash optimization, and cost structure.

In the last quarter, Bed Bath & Beyond reported cash and cash equivalents of $107 million. These numbers warned that the company may be starting to struggle to pay its obligations.

Bed Bath Beyond's current ratio of assets to liabilities is 1.01, an all-time low. This indicates that, for every $1 of debt that is paid off, there is only 1 cent left over for the company.

A few weeks ago, Freeman Capital revealed a passive investment in Bed Bath & Beyond that constitutes about 6.21% of BBBY shares. The firm is pushing for debt realignment, as Bed Bath & Beyond carries long-term debt of nearly $1.2 billion.

According to Freeman, Bed Bath & Beyond needs to "enter into a swap to exchange current senior unsecured debt for notes with a significantly lower face value" to reduce its liabilities and survive.

So it's understandable why a company struggling with its financial health like Bed Bath & Beyond would attract bears. But wouldn't it be too risky to bet against a company that has a thin float (about 69.45 million shares), that is already over 40% short-sold, and that has Reddit-based retail investors eyeing its stock?

The truth is that, for months, Bed Bath & Beyond was a comfortable bet for short sellers. Borrow fees were low throughout (around 1%), and there were plenty of shares available for lending.

Figure 2: BBBY borrowed shares.

Figure 2: BBBY borrowed shares.

With retail companies facing a pessimistic scenario and losing money, short sellers were sure that Bed Bath & Beyond would collapse.

They certainly didn't count on a rebound fueled by "meme mania."

Data through August 10 provided by S3 Partners implies that some Bed Bath & Beyond short sellers were down $68 million in 2022 mark-to-market losses. Since then, the losses have only increased.

Many short sellers have had to cover their positions by paying borrow fees 50% more expensive than before, as the chart above indicates.

Will the BBBY Rally Continue?

Bed Bath & Beyond is a poster child for meme stocks because it challenges the logic behind standard stock trading. The uber-volatile moves in BBBY are driven by social media trends, rather than by any improvements to the company's business.

Option chain open interest — the number of outstanding options contracts — serves as an interesting indicator of the current bullishness regarding Bed Bath & Beyond shares. It measures the value of options contracts that have been created but not yet closed.

Recent history shows that on Friday, August 5, when the stock hit $8.16 per share, open interest call options were at roughly 37,100, leading BBBY shares to jump nearly 40% the following Monday.

A week later, on Friday, August 12, open interest increased to about 62,800 call option in-the-money contracts. That was nearly double what we saw on August 5, the previous expiration date. BBBY shares closed the week 18% higher.

Looking further ahead, the open interest for call options that expire in January 2023 stands at more than 305,000, with strike prices between $8 and $80.

Adding even more fuel to the fire is the fact that GameStop Chair and activist investor Ryan Cohen, who owns a stake of about 10% of Bed Bath & Beyond shares, has also bought option calls expiring in January 2023 at an exercise price between $60 and $80 per share. And recently, Cohen disclosed that he was still in his call options.

This substantial increase in open interest indicates that the rally in Bed Bath & Beyond stock should continue for some time yet.

Therefore, it is possible to assume that the Bed Bath & Beyond stock rally has not yet reached its point of maximum financial risk, probably being in one of the three preceding stages — optimism, excitement, and thrill. 

Figure 3: The emotional cycle of investing.

Figure 3: The emotional cycle of investing.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)