GameStop and AMC: Hitching a Ride on Bed Bath & Beyond’s Epic Short Squeeze

Despite being on the verge of bankruptcy, Bed Bath & Beyond's stock has soared in the last week and has taken GameStop and AMC with it. Here's what you should know.

• The first major short squeeze of the year took place last week, with Bed Bath & Beyond BBBY at center stage.

• GameStop ( GME ) - Get Free Report and AMC Entertainment ( AMC ) - Get Free Report were both able to ride the short squeeze wave, though their shares’ gains were more modest.

• Highly volatile trading activity has caused Bed Bath & Beyond’s shares to be put on the “threshold securities list,” meaning it’ll receive extra scrutiny from regulators.

Read also: AMC Stock: Charts Show Bulls Regaining Control

Bed Bath & Beyond’s Insane Rally

Yes, the market has yet another meme stock short squeeze on its hands. Those who thought that Bed Bath & Beyond’s story was nearing its tragic, uneventful end were proven wrong.

It’s easy to see why so many thought the end was near for Bed Bath & Beyond. The home goods retailer recently reported awful third-quarter earnings results that missed market estimates across the board. Sales were down about 33% compared to the same period last year, and only $153 million in cash remains on the company’s balance sheet (compared to $1 billion in Q3 2021).

A week ago, the company's management declared that bankruptcy was not out of the question… and even so, shares of the home retailer just soared about 120% in just two trading days.

The setup for a short squeeze leading into this abrupt rally was perfect. About 52% of Bed Bath & Beyond's float was held short, and a sudden increase in buying volume put heavy pressure on short sellers. That pressure was compounded by an increase in borrow fees, which reached nearly 50% for brief stretches.

S3 Partners analyst Ihor Dusaniwski also highlighted an important point concerning institutional investors. According to Dusaniwski, it has been a while since short interest in Bed Bath rose by about two-thirds while institutional long-holding fell by about two-thirds. That means that Bed Bath & Beyond has become a true retail stock, making it highly susceptible to socially mobilized trading.

Everyone’s in The Same Basket

Bed Bath & Beyond, GameStop, and AMC are all typically placed together in the “meme stock” category. All three companies are majority owned by retail investors and are targets of heavy shorting activity.

These stocks are highly volatile and highly influenced by their shareholder bases, and their movements are often correlated with each other. In a way, meme stocks have become a kind of unified segment.

There are some important distinctions to make between these stocks, however. On social media discussion boards, I see GameStop, with its r/superstonk subreddit, and AMC shareholders, with its r/amcstock subreddit, each sporting hundreds of thousands of engaged retail investors. Bed Bath & Beyond, on the other hand, has periodically reached exceptional levels of popularity on broader forums such as r/wallstreetbets, but it does not boast as large of a dedicated “fan base.”

Moving in tandem with Bed Bath & Beyond, GameStop shares shot up about 16% in just two trading sessions last week, while AMC shares rose 25%. AMC's higher increase was probably due to its higher borrow fees (AMC borrow fees have crested near 90%, while GameStop's borrow fees are closer to 20%).

The YTD loss to short sellers is already hefty. So far, Bed Bath & Beyond short sellers have lost $41 million in 2023, GameStop's short sellers have lost $37 million, and AMC short sellers $109 million.

On the Lookout For Naked Shorting

The illegal practice of naked shorting is a topic that permeates many retail investor forums. The practice consists of dodging the process of borrowing the stock in order to sell it short and, consequently, selling short shares that do not necessarily exist.

After Bed Bath & Beyond’s recent rally, its shares have been added to the threshold securities list , known as Regulation SHO. This occurs when a particular security has had its transactions unsettled for five consecutive days of settlement. Of note: settlement failure is also associated with naked shorting.

There are also legitimate reasons that a company’s shares may fail to deliver, such as human error or system crashes. But regulators generally look more closely at possible naked short-selling practices in stocks that make it onto this type of listing.

This added regulatory scrutiny, in theory, should disallow any further naked shorting by bears, in turn reducing the possibility of BBBY’s share price being influenced by illegal means.

(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)