Despite Ryan Cohen’s exodus from BBBY, retail investors are still interested in the stock. Here’s what investors should know.
Bed Bath & Beyond has been an obvious short-selling target thanks to its deteriorating business fundamentals.
However, there are many risks involved in short selling a stock. That’s even more true for meme stocks.
With Bed Bath & Beyond’s popularity among retail investors growing, it may not be game-over for BBBY yet.
Why Are Short Sellers Targeting BBBY?
At first glance, Bed Bath & Beyond Inc (NASDAQ: BBBY) might seem like a no-brainer short play. There are a number of reasons why. Among them:
Cumulative negative earnings over the last few years; earnings yield of -72%
Seven earnings misses in the previous 10 quarters
Return on invested capital (ROIC) of -26%
Liquidity down sharply to its worst level in at least the last 10 years
Cash burn of roughly half-a-billion dollars in the first quarter
Total equity debt at the highest level in the company’s history
It’s no wonder that Bed Bath & Beyond’s short float is nearly 40%.
Of course, there’s another big reason why BBBY is so attractive to short sellers: Bed Bath & Beyond doesn’t have any clear prospects for achieving profitability in the short term.
The company reported a drop in sales growth of 25% last year, compared to an industry high of 61%.
Next year, Bed Bath & Beyond’s sales are expected to grow 1.7% – which is better than the industry-wide expectation of a 0.6% decrease. Still, it is not enough.
What Are the Risks of Shorting a Stock?
Short selling involves risks such as limitless losses, which do not exist in long positions where the maximum downside is the cost of your initial investment. If you open a short position in a stock that continues to rise, you will need to cover the difference to replace the borrowed shares.
In addition, borrow fees can vary, depending on the demand for short positions in a particular stock. It’s not uncommon for a short position’s borrow fee rate to rise from 20% to 40% — or even 80% — overnight.