Tuesday, August 16, 2022
Longtime readers know I love the market truism that “Stock prices ultimately follow earnings.”
Why? Because stock prices do follow earnings! That is, over the intermediate- to long-term.
But in the short-term? Well, as the latest meme stock – Bed Bath & Beyond Inc. (BBBY) – proves, the vagaries of the market can artificially and temporarily interfere with this fundamental law.
Trust me, though, it won’t last.
Here’s how to profit from the situation (again)...
I know simply saying that stock prices follow earnings doesn’t cut it. I have to prove it.
Thankfully, I can do it with a single chart…
A chart that shows the trailing 12-month earnings per share for S&P 500 companies versus the price performance for the S&P 500 index.
As you can see, aside from temporary and short-lived dislocations involving major economic events (think dot.com bust, the Great Recession, etc.), the correlation couldn’t be any stronger.
Simply put, if earnings are headed higher, so is a stock.
And vice versa — which shareholders of Bed Bath & Beyond, Inc. have been learning the hard way for the better part of the last year.
On the heels of cringe-worthy collapses in earnings per share of as much as 92%, shares cratered nearly as much.
More specifically, the stock peaked around $30 per share last August before plumbing the $4 per share level this July.
More recently, though, the stock’s been on a tear, rallying 13 out of the last 14 trading sessions and reclaiming the $16 per share level.
What gives? Did earnings suddenly surge?
Given the unofficial recession we’re currently experiencing, the earnings outlook couldn’t be gloomier.
In fact, the same potent mix of bearish headwinds continue to plague the retailer, including supply-chain bottlenecks... increasing online competition… rising transportation costs… inflation… and the list goes on and on.
Heck, in the most recent quarter, the company reported a 27% collapse in same-store sales and a staggering quarterly loss of $224 million. The results were so bad the board of directors fired the CEO.
With a mere $107 million left in the bank, there’s no time for a new executive to even have a chance to turn the company around.
In short, the company is on life support and destined to end up in the retail graveyard, right alongside Radio Shack, Circuit City, and Sears, among others.
Or as Mark Cohen, Columbia University professor of retail studies and former long-time CEO of Sears Canada, recently told Yahoo Finance Live:
“Bed Bath & Beyond is in a world of hurt because they have burned an enormous amount of available cash, their business has no forward momentum, and now as we all know they have an enormous leadership gap that they will have to fill.”
As I’ve bellyached about before, it’s challenging for a fundamental analyst like me to watch investors pocketing millions of dollars trading trashy meme-stocks like Bed Bath & Beyond.
But thankfully, normalcy eventually returns. Mark my words, Bed Bath & Beyond will be no exception.
And I’m not alone.
Cohen believes Bed Bath & Beyond will “teeter-totter into a restructuring sometime in the beginning of 2023." And I agree.
In other words, the stock’s eventually headed back to zero.
For right now, it’s time to take our profits from our previous Trend Trader Daily “Trade of the Week” and then simply wait for the ideal re-entry point to make another triple-digit profit.
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Ahead of the tape,