A smarter way to invest in Bed Bath & Beyond’s recovery (BBBY)

Bed Bath & Beyond (BBBY) is a houseware retailer with a strong brand that has recently fallen on hard times. For many consumers, it’s almost unthinkable that such a well established brand would disappear. The company even played a role in the 2006 Adam Sandler film Click. Given the turmoil, is it a good idea to invest in Bed Bath & Beyond?

Recently, the business has struggled to keep up with dwindling demand for low-end merchandise, competition from online retailers, and supply chain inflation. It has been on the verge of bankruptcy and the stock price is severely depressed. Nevertheless, with its highly recognizable brand, preexisting brick-and-mortar footprint, and established e-commerce business, BBBY makes a compelling turnaround investment. 

Of course, this is an extremely risky proposition that is unsuitable for most investors. These risks haven’t stopped retail traders, however. BBBY is a hot topic on various Short Squeeze Theory forums found on reddit, twitter, and elsewhere. The stock has seen extreme bidirectional volatility as speculators position themselves. While eyes are on the stock price, the bonds are poised to perform just as well with potentially much less risk if the company survives through 2024.

Bondholders are paid before shareholders

If a company avoids bankruptcy, bondholders will be repaid in full from the company’s assets. Bondholders have priority over shareholders if a company does file for bankruptcy and must be paid back first. However, if the company is able to successfully restructure its debt and remain solvent, bondholders will be repaid in full from the company’s assets, including cash, real estate, and other investments. Bondholders are also entitled to any dividends or other payments the company may issue. It is important that bondholders understand that if a company is able to pay its debts in full, they will receive full repayment of their investment.

As of Feb 3rd, BBBY ’24 bonds were trading around 6¢ on the dollar. If BBBY survives until Aug 2024, these bonds would return over 16x on the investment at that price. Annualized, this is over 1000% per year which is exceptionally rare.

What about the stock?

In order for the stock to return 1000%, it would have to reach a price of $30. Assuming no further dilution, this implies a market cap of around $3.6 billion. BBBY saw this valuation briefly in 2021, but it hasn’t sustained it since 2017. If it takes just as long to recover as it did to degrade, this means it could take over 5 years to reach $30. Optimistically, this would be about 200% annualized.

Investors serious about recovery should consider bonds over the stock. Not only is there a large upside potential, but the holding period is likely to be shorter. Bonds have the further advantage of a being paid before shareholders in the case of liquidation and (most likely) dividends.

Simply put, the recent upward moves in BBBY stock are unwarranted given the opportunity in the ’24 bonds.

BBBY Market Cap Chart 2023

BBBY market cap going back to 2017

BBBY bond price chart over the past 1 month

Don’t just take our word for it

Jim Chanos is one of the shrewdest investment managers. His first major claim to fame was identifying the fraud at Enron, and shorting the stock aggressively. While he probably doesn’t see much of a future for BBBY, even he recognizes that bonds are a more compelling investment than the shares.

A final word of caution

At the time of publication, bonds have increased in price to 24¢ which reduces the upside potential. However, even a 4x return over the span of a year and a half is exceptionally rare. For the aforementioned reasons, it would be very difficult for the stock to achieve the same result.

We cannot stress enough how risky it is to invest in Bed Bath and Beyond. Both BBBY stock and its bonds have a very high probability of becoming worthless. The market is already pricing in a high likelihood of this outcome. The aforementioned trades are unsuitable for most investors and are not a typical examples of our advice. Rather, we felt compelled to comment on this current event because the disconnect between stock and bond prices presents a rare opportunity for learning.

Disclaimer: At the time of publication, at least one member of Magnifina staff held a short-term position in bonds issued by Bed Bath & Beyond Inc. The trades mentioned in the above article are unsuitable for nearly all of our clients and are not indicative of our typical advice.

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