The 24 percent drop in Bed Bath & Beyond Inc. (BBBY:US) this year has left the stock the cheapest ever compared to competitors and traders are betting on a rebound.
Investors speculating on a rally have pushed up the price of bullish options to the most expensive level on record relative to bearish ones, according to data on three-month contracts compiled by Bloomberg. There are about 7.2 puts outstanding (BBBY:US) for every 10 calls, down from a ratio of 13-to-10 in early March.
Bed Bath & Beyond shares have been punished after the home furnishing retailer posted two quarters of lower-than-estimated profit amid a harsh winter and competition from online stores such as Amazon.com Inc. The stock trades at 12.7 times reported profit, close to the lowest level ever compared with an gauge of retailers in the Standard & Poor’s 500 Index.
“This is more bottom fishing than really trying to call a turn,” said Laura Champine, a New York-based analyst with Canaccord Genuity Corp., said in a May 20 phone interview. “It’s just a very low valuation for what’s perceived a high-quality name.”
Champine, who recommends holding the stock, said options traders are betting retailers will see sales improve after winter weather kept shoppers indoors. The company is less vulnerable to competition than other retailers because some of its products aren’t available on Amazon, she said.
About $4.8 billion in market value has been erased this year from Bed Bath & Beyond, which runs almost 1,500 brick-and-mortar stores including Cost Plus World Market and Buybuy Baby. U.S. retail sales increased 0.1 percent in April following a revised 1.5 percent jump in March that marked the biggest gain in four years, Commerce Department figures showed earlier this month.
Calls betting on a 10 percent increase in the stock cost 1.57 points less than puts protecting against a similar drop, according to data on three-month contracts (BBBY:US) compiled by Bloomberg. The price relationship reached a record low of 0.93 on May 20.
The three contracts with the highest ownership are bullish. August $70 calls had the most open interest, followed by June $67.50 calls and August $72.50 calls. The ratio of outstanding puts to calls was 0.67 on May 16, the lowest since June 2013.
Leah Drill, a spokeswoman for the Union, New Jersey-based company, didn’t return a request for comment.
Bed Bath & Beyond’s growth was already slowing before the cold winter started, according to David Magee, an analyst with SunTrust Banks Inc. in Atlanta. Analyst estimates show the company’s profit will increase 7 percent on average in the next two years, compared with growth exceeding 30 percent in 2011 and 2012, data compiled by Bloomberg show.
“They’re not a small, nimble company the way they used to be,” Magee said in a phone interview yesterday. “When a retailer slows its growth to, in this case, very low single digits, it tends to mean more volatility.”
Bed Bath & Beyond needs to shake up its approach to marketing, build new stores faster and expand the number of products that consumers can’t find at other retailers if it wants to keep growing, Magee said in an April 15 report. He recommends buying the shares, citing its inexpensive valuation.
John Fox, director of research at Fenimore Asset Management, said he’s bullish on Bed Bath & Beyond shares because the company is committed to improving its online business. Among the 31 retailers in the S&P 500, the stock has the fourth-lowest price-earnings ratio, data compiled by Bloomberg show.
“There is an advantage with having a website and a physical location to do returns or to look at the product and feel the product,” he said by phone on May 20 from Cobleskill, New York. “The company’s going to be worth more in a few years.”
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