If you have a strong tolerance for volatility and understand the principles of risk management, here’s an idea to consider. Bed Bath & Beyond (NASDAQ:BBBY) is in terrible shape as a business. There have been rapid run-ups in BBBY stock, but they didn’t last. Ultimately, Bed Bath & Beyond’s share price should reflect the company’s actual value, which isn’t stellar.
In other words, audacious traders might think about taking a short position against Bed Bath & Beyond. This isn’t something that cautious individuals should do. It’s a high-risk, potentially high-reward bet based on Bed Bath & Beyond’s frail fundamentals.
Moreover, be sure to have a plan in place, in case this trade goes awry. With that in mind, if you’re ready, let’s take a closer look now at Bed Bath & Beyond.
Bed Bath & Beyond and the Dreaded “B” Word
What does the letter “b” stand for? Is it beds, baths or perhaps something beyond? In 2023, the answer is none of the above as “b” stands for bankruptcy.
None of this ought to be a surprise, really. Earlier this year, Bed Bath & Beyond acknowledged that it “will likely file for bankruptcy protection” if the company cannot receive the proceeds from a $300 million common stock offering. Additionally, you were warned in March that Bed Bath & Beyond was closing hundreds of its stores.
And so, here we are. Last week, according to Bloomberg and The Wall Street Journal, Bed Bath & Beyond was preparing a bankruptcy filing. Adding insult to injury, CNN reported that Bed Bath & Beyond “stiffed thousands of workers on severance pay.” And then, on April 23, it was categorically reported that Bed Bath & Beyond had “filed for Chapter 11 bankruptcy protection.”
BBBY crashed 35.34% on April 20. This occurred after the release of Bloomberg‘s and The Wall Street Journal‘s reports of Bed Bath & Beyond’s Chapter 11 preparations. I feel bad for anyone who held on to their shares in hopes of a meme-stock rally. Yet, the market’s weighing machine was bound to re-rate Bed Bath & Beyond lower eventually as the company is deeply unprofitable and burdened with considerable debt.
Hedging Your Short Bet With BBBY Stock
Shorting BBBY stock might seem like a no-brainer, but be careful. Capital.com analyst Daniela Hathorn explained how Bed Bath & Beyond can still entice meme-stock traders into long positions:
“With bankruptcy looming, the fundamentals of the company are not attractive to new investors, but renewed social media attention is causing a false sense of demand.”
The “sense of demand” might be “false,” but meme-stock rallies can be vicious. From time to time, you might see headlines about the Bed Bath & Beyond share price surging “as meme trading ramps up.” An example would be a 29% single-day stock-price rally that took place “despite ongoing concerns about the state of the business.”
Therefore, any short position in Bed Bath & Beyond should be very small, and you’d better have an exit strategy in place. Using a stop-loss is one idea; buying protective call options is another way to hedge your short position.
Should You Consider Short-Selling BBBY Stock?
Clearly, Bed Bath & Beyond is on a downward spiral. Nevertheless, social media traders can induce short-term rallies in the share price. So, if you’re thinking about taking a short position, be sure to keep it very small and have an exit plan in place.
With all of that in mind, a short position against Bed Bath & Beyond is worth considering. Just be aware that if the trade goes against you, it’s possible to lose more money than you have in your account. Still, given Bed Bath & Beyond’s ongoing problems, bold traders can weigh their options and think about short-selling BBBY stock.
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On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.