Making Money on Bed Bath & Beyond in a Wal-Mart World

NEW YORK (TheStreet) -- If you're a Bed Bath & Beyond (BBBY) investor, Wednesday's earnings release must have felt like squeezing the only shampoo bottle only to find nothing left while hurrying to prepare for a big job interview.

Bed Bath & Beyond's stock plummeted more than 15% Thursday even as the company said earnings per share rose 24% to 89 cents per share. It was at least the fourth quarter in a row that Bed Bath & Beyond beat estimates. Unfortunately, expected earnings moving forward captured Wall Street's attention. Analysts' downward revisions for the next earnings report outnumber higher revisions 3 to 1. The stock price fell through strong support at the 200-day moving average of $63.50.

Bed Bath & Beyond's CEO Steven H. Temares blames the economy for softness, but sales were not bad. Net sales climbed 5.1% to $2.2 billion, and same-store sales advanced 3%, slowing from a pace of 7% a year earlier.

Insiders sold over 1.5 million shares, or about 5% of their holdings, in the past six months. Some will say there are many reasons why insiders sell (stock options, etc.), but the bottom line is the motivation to sell or buy is nearly the same. You don't sell a stock you think is moving higher in price regardless of the source.

The soft economy is allowing Wal-Mart ( WMT), Macy's ( M) and Target ( TGT) to execute well; however, they are not alone. Pier 1 Imports ( PIR) and Amazon ( AMZN) are both up with conviction from a year ago.

Amazon's big move into the home-furnishings space has many Bed Bath & Beyond investors scratching their heads wondering if margins will get squeezed.

Considering Amazon is comfortable operating on razor-thin margins, the concern is well-founded. Bed Bath & Beyond will likely have to maintain aggressive technology expenses to keep up with Amazon. Even if Amazon trips and falls, it is so large it will have an impact. (Read my Amazon: No Such Thing as Free Shipping article.)

Based on my experience with gap downs following reductions in guidance similar to Bed Bath & Beyond's, investors may not see the short-term low until today or, more likely, Monday.

Bargain hunters and short sellers covering positions could push the price up about 30%-50% in relation to the gap down price this week. Looking at the chart, I expect short-term resistance near $63.50 and again at $68. Expect a lot of volume to trade near $60 a share, but also be prepared for bargain hunters to start positions under $60 as an entry. Bed Bath & Beyond doesn't have debt and the price-to-earnings multiple is under 15.

If you are looking for the share-price drop to signal a buying opportunity, you are likely going to find the end of the day Friday or opening on Monday better than Thursday. There is no hurry jumping on board with Bed Bath & Beyond. Stock dumping as a result of lowered guidance normally takes a full two earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $70 as the one that "sticks."

Operating margins, while already low compared to Limited and Ross Stores, appear closer to Wal-Mart and Target. Without a strong holiday season, an operating margin drop below the Gap and closer to Aeropostale ( ARO) may become a reality.

Want to see a classic "miss" a few weeks after the fact? Take a look at Dell ( DELL). The computer maker disappointed and traded from $15 down to an intraday low of $12.31. Also, take close note of the next few days after earnings. This is a pattern I see often, and you can too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Dell is now resistance.

Pandora (another earnings disappointer) also took more than two months in recovery to reach the gap down price. Pandora, like Dell, will take about six months to trade again at pre-gap pricing, if the next two reports are favorably received by investors. I love listening to Pandora; but I am not ready to invest just yet.

What's the best play with Bed Bath & Beyond? There should be a very attractive trade coming up today or Monday. Near the end of the day, if it's still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom. It's not one to get greedy with, hold on for a few days and as the implied volatility falls (hopefully with a nice dead-cat bounce), exit out with a quick hit and run for profits. Otherwise for longer-term investors, the best play is to wait until we are closer to the next earnings release for an entry.

Disclosure: The writer holds no positions in any of the stocks mentioned.

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