The risks of insolvency intensified after the company reported disappointing earnings in mid-January that missed in terms of both EPS and revenue.
In addition, because sales have declined by more than a third since the same period last year — and the fact that Bed Bath & Beyond's operating loss has grown to $225 million, with only $153 million in cash left — the company has had to close roughly 150 stores and lay off a good portion of its staff to try to fix its financials.
Even so, the company's management has made it clear that bankruptcy is a strong possibility, and that the company is looking for alternatives to restructure its debts.
As you can imagine, investors are bearish on Bed Bath & Beyond, and the exodus of institutional investors and the increase of short BBBY positions have intensified.
Of the top 10 owners of Bed Bath & Beyond shares, the vast majority have sold off sizable portions of their positions. See below:
Figure 2: Top 10 owners of Bed Bath & Beyond.
CNN
S3 Partners analyst Ihor Dusaniwsky recently highlighted an important point concerning institutional investors. According to Dusaniwsky, it has been a while since short interest in BBBY rose by about two-thirds, while institutional long-holding fell by about two-thirds.
Currently, Bed Bath & Beyond ranks among the top three most shorted stocks in the stock market, with 56% of its float currently being shorted.
That means that Bed Bath & Beyond has become a true meme stock, making it highly susceptible to socially mobilized trading.
Bankruptcy As a Booster
It may seem paradoxical, but looking at other companies that have recently filed for chapter 11, we have seen voracious trading activity in the days following the bankruptcy announcement.
It turns out that bankruptcy may turn out to be not as bad as it first appears. Many companies that filed chapter 11 still managed to survive. Chapter 11 itself does not indicate an end for the company. Instead, it can give a company a second chance to restructure and reorganize its business.
But well-known companies like General Motors ( GM ) - Get Free Report and Marvel — which is a Disney ( DIS ) - Get Free Report subsidiary now — also filed for bankruptcy in the past and managed to emerge stronger than ever.
Moreover, because the company's stock continues to trade, it can be positively affected by factors not related to its fundamentals — especially when it comes to meme stocks.
The Short Squeeze Setup
The bearish momentum that Bed Bath & Beyond's business fundamentals are experiencing may be reversed into a bullish trend for its share price, mainly due to the very high short squeeze risks.
The fact that more than half of the company's float is shorted — along with the very high volatility in borrow fees in the last few weeks when they recently reached above 250% (see below) — could be fatal for short sellers.
Figure 3: Bed Bath & Beyond's borrowed shares.
Stocksera, data by Interactive Brokers
However, the stock is at risk of a short squeeze because Bed Bath & Beyond shares are very popular on social media platforms.
Plus, Bed Bath & Beyond shares are more than 10 trading sessions into the threshold security list, also known as Regulation SHO .
Stocks on the list have had their transactions unsettled for five consecutive days. And settlement failures are often associated with the illegal practice of naked shorting (although there are legitimate reasons why a stock may be included on the list, including human error or system crashes).
With BBBY on this list, the stock should receive greater scrutiny from authorities looking for irregularities in the trading activity of short sellers. This may reduce naked shorting and benefit those who are on the opposite side of the trade.
(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)
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