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6 Warnings from Bed Bath & Beyond

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Credit Sesame discusses 6 lessons to learn from Bed Bath & Beyond.

Many see the recent collapse of Bed Bath & Beyond as sad but inevitable after the earnings disaster covered by the media earlier in the year. After more than 50 years in business it is certainly shocking. However, the financial struggles of the company and the plunge in its stock over the past year or so should be no surprise. However, as obvious as some of the warning signs have been, this is just the latest case where many investors have chosen to ignore them.

What can investors learn from Bed Bath & Beyond?

There are six lessons investors can take from the troubles surrounding Bed Bath & Beyond. These lessons apply not just to that stock, but to all investments.

1. Meme is the new hype

Stock promotion is an old tradition on Wall Street, and often not an honorable one. It involves hyping a stock to drive up its price.

In the old days, this might have involved planting positive stories with journalists and spreading positive rumors among contacts in the investment community. That may sound innocent enough. The motivation though, was that people who either owned the stock or had other financial incentives tied to its price were trying to convince other investors to buy in at higher prices.

In some cases, the Securities and Exchange Commission (SEC) has cracked down on this kind of activity. The SEC warns that stock promoters may spread fraudulent information, fail to disclose their financial incentives or operate under false identities.

Unfortunately, with the popularity of social media this kind of activity has become so commonplace that it’s impossible for the SEC to police it comprehensively. This hype now has a new name: the meme stock.

Along with a handful of other stocks, despite its business problems Bed Bath & Beyond has benefited from a flurry of positive tweets and comments from chat room enthusiasts.

Before you buy a stock based on social media buzz, keep in mind that the people generating that buzz probably already own the stock. They’re hoping to convince you to buy in at a higher price.

Worse, the targets of meme stock buzz are often companies with serious business problems. The price dips that reflect those problems create a stronger profit motive if a meme campaign can generate enough hype to cause a bounce in the stock. Of course, that temporary bounce does nothing to address the company’s fundamental business issues.

2. Stock buybacks should raise questions

One red flag Bed Bath & Beyond has raised is its heavy use of stock buybacks.

A company buying its own stock can be a smart financial tactic. If the stock price is depressed and the company is flush with cash and generating positive earnings, reducing the number of shares on the market can boost earnings per share.

Under other circumstances though, stock buybacks represent an artificial means of supporting a stock’s price. In particular, if you see a company buying back its stock at above-average prices and when the company is having to raise cash by borrowing, you should question whether it’s a sound financial move.

3. Online disruption of retail is an ongoing story

As noted earlier, troubled stocks are juicy targets for stock manipulation. There’s a quick buck to be made from generating a bounce in a depressed stock price. These stocks may also be relatively thinly traded, which makes their prices more responsive to a sudden surge in prices.

That helps explain why certain companies that have relied heavily on brick-and-mortar retail locations have been made over into meme stocks. First the rise of online shopping and then the pandemic punished business models based on in-person shopping.

That created the depressed prices that are opportunities for hype. Again, generating a social media buzz about a beaten-up stock can earn a quick profit for people who got into the stock at low prices. However, it does nothing to solve the underlying business problems. Some companies are struggling to make the transition from traditional to online retail, and  that problem isn’t going to go away.

4. Fundamentals are as important as ever

Looking at a company’s financials is not as fun and trendy as reading clever online posts hyping a stock. However, even in the age of social media, looking at the fundamentals of a company is still essential for any serious investor.

For example, one thing that meme stocks like Bed Bath & Beyond, GameStop and AMC all have in common is negative earnings. Now that the economy has bounced back from pandemic shutdowns, it’s fair to ask when these companies will be able to generate positive earnings if they can’t do it now. It certainly won’t get any easier if the economy slips into a recession.

In the case of Bed Bath & Beyond, there have been signs that its financial difficulties have taken a toll on the company’s ability to do business. A CNN story in August reported that some suppliers were refusing to ship to the company because of late payments.

That’s the kind of thing an investor should want to know.

5. CEOs are not miracle workers

Bed Bath & Beyond has now fired two CEOs within the past few years. More recently, the Chief Financial Officer committed suicide. It is fair to say that the company has faced challenges within the ranks of senior management.

That lack of continuity is a problem. It also points out a reality about the limitations of management. There’s something of a superstar aura around CEOs. Often they help cultivate that aura themselves, because it helps them get paid more.

The reality is that even a great CEO can’t make a bad business model work. When a company starts shuffling new leadership in and out of the corner office, it looks more like they’re grasping at straws than solving their problems.

6. Make a distinction between speculation and investing

Sober discussion of fundamental investing is nowhere near as fun as following a meme stock. You may even believe that you can read the buzz correctly, and get in and out of a stock at the right time.

If you do that kind of thing, it’s useful to understand that you are speculating rather than investing. That’s a choice, but it’s wise to limit speculation to a small portion of your portfolio. The bulk of your stock holdings should be in companies with build-to-last business models.

Probably better not to stake your financial security on a meme.


Footnote

Corporate financial challenges aside, the real tragedy is human. The company’s Chief Financial Officer, Gustavo Arnal, took his own life on September 2, 2022. Credit Sesame cannot speculate on the precise reasons why but, as great as the pressures of public company finance are, no one should feel so trapped that this is the solution. May he rest in peace.


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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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