Investing is very much an inexact science. While it would be great if companies that executed well rose in value and poor-performing businesses saw their share prices decline, it doesn't always work out this way. Investor sentiment and technical analysis -- using chart patterns to determine whether a stock will head higher or lower -- are just some of the factors that can disrupt traditional fundamental analysis, which lets income statements and balance sheets dictate where a company's share price will head.
However, the bond market isn't swayed by investor emotion and technical analysis in the same way stocks can be influenced. Corporate bond traders are simply focused on the health of the underlying business and the likelihood they'll be repaid in full when the note they hold matures.
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Without getting too far into the weeds, bonds are typically issued at par -- i.e., 100% of face value. Financially sound companies will usually see their bonds trade in a range of perhaps 10% below to 5% above face value.
On the other hand, a company whose bonds go for 50% or more below their initial issue price are sounding a clear warning that the underlying equity may be worthless. Bondholders have priority over common stockholders in the event that a company seeks to reorganize under Chapter 11 or liquidates under Chapter 7 bankruptcy protection. If bond prices plummet, it's usually a sign that the bond market believes a stock could head to $0.
Based on their current bond prices, the following three ultra-popular stocks may eventually be worthless.
Bed Bath & Beyond
The first exceptionally popular stock that could eventually head to $0, based on what the bond market is telling Wall Street, is home furnishings retailer Bed Bath & Beyond (BBBY).
The company has debt lots that come due in 2024, 2034, and 2044. As of Feb. 7, 2023, these bonds were respectively trading for roughly $0.15, $0.11, and $0.14 on the dollar. In other words, they were all between 85% and 89% below par, which is a pretty good indication that bondholders are doubtful they'll be repaid in full.
Bed Bath & Beyond did work out a deal to secure up to $1.025 billion in cash over time ($225 million secured up front) earlier this week. However, securing this financing involved the issuance of convertible preferred stock and warrants that could balloon its outstanding share count by nearly 700% to 900 million shares. It's an exceptionally dilutive deal that favors Hudson Bay Capital, which purchased most of these convertible preferred shares.
The issue for Bed Bath & Beyond is that raising capital doesn't resolve its underlying operating problems. It's a predominantly brick-and-mortar retailer with products that aren't differentiated enough to drive consumers into its stores. As a result, it's been eaten alive by online retailers in recent years.
Worse yet, management made the decision to waste capital on share buybacks, even as the company's business deteriorated. Without the capital wasted on share buybacks, Bed Bath & Beyond might have had enough money to enact a turnaround, or at the very least navigate an economic downturn, without having to seek a highly dilutive convertible preferred stock offering.
My suspicion is the company's capital raise bought it some time, but it ultimately won't be enough to save the company from restructuring under Chapter 11. If that were to occur, there wouldn't be any value left for common stockholders.
Carvana
A second ultra-popular stock the bond market believes may head to $0 is online used car buying-and-selling platform Carvana (CVNA 8.79%).
Carvana has four debt lots that stand out as particularly concerning. The company's $500 million due in 2025, $600 million due in 2028, $750 million due in 2029, and $3.275 billion due in 2030 were all issued at face value. However, the 2025, 2028, 2029, and 2030 notes are currently trading at $0.53, $0.42, $0.28, and $0.50 on the dollar, respectively.
These signify distressed levels imply that Carvana may not be able to meet its debt obligations. More importantly, it infers the common equity is potentially worthless.
During the pandemic, Carvana was perfectly positioned to grow at a torrid pace. With people effectively stuck in their homes, used car purchases and sales were easily completed on its platform. Despite this perfect opportunity for Carvana, the company wasn't able to generate a full-year profit.
With the worst of the pandemic now in the rearview mirror, the wheels have completely come off of Carvana's operating model. There's no longer any sizable incentive for shoppers to buy online when they can easily walk into a dealership to view and test-drive new and used vehicles.
Additionally, interest rates are climbing at their fastest pace in four decades, which makes financing a new or used car purchase costlier. When coupled with a plunging U.S. personal saving rate, it's no surprise that we've begun to see used vehicle sales slowing down.
Even with Carvana reducing its ad spend and shrinking its website inventory, profitability is likely three or more years away. With the company continuing to burn cash, an eventual decline to $0 is in the realm of possibilities.
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Aurora Cannabis
The third ultra-popular stock the bond market implies is eventually headed to $0 is Canadian licensed cannabis producer Aurora Cannabis (ACB -0.15%).
The only outstanding debt Aurora has at the moment is what remains of a 2019 convertible debt offering totaling 345 million Canadian dollars (CAD) (about $257.6 million in U.S. dollars). In December 2022, it repurchased $102.5 million CAD of these notes, which left just $148 million CAD outstanding. Despite having just 43% of the initial offering left to be repaid, these notes are trading at only $0.30 -- i.e., 70% below their issue price.
In one respect, Aurora Cannabis and its peers were somewhat sabotaged by Canadian federal and provincial regulators. The slow rollout of cultivation and retail licenses in key provinces (e.g., Ontario) didn't allow legalized marijuana stocks to adequately compete against gray-market cannabis.
But make no mistake about it: Aurora Cannabis shot itself in the foot plenty of times. It made around a dozen grossly overpriced acquisitions and was on track to produce more than 600,000 kilos of cannabis annually, if all of its properties were fully developed. To offer some context, Canadians consumed around 391,000 kilos of legal weed in 2022. Aurora's unwarranted buying spree led to billions of dollars in write-downs.
Another problem for Aurora Cannabis is that Canadian consumers have gravitated toward value-priced dried cannabis flower. Licensed producers were counting on strong sales for high-margin derivatives, such as vapes and edibles, but this simply hasn't materialized.
However, the nail in the coffin for Aurora Cannabis has been management's penchant for dilution to raise capital. Between June 30, 2014, and Sept. 30, 2022, Aurora's outstanding share count ballooned from around 1.3 million to just over 300 million. Keep in mind, this factors in the company's 1-for-12 reverse stock split that was conducted in May 2020. This incessant dilution has driven Aurora's stock back down to $1.
Despite management eyeing a push to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), Aurora remains a long way from becoming truly profitable on an income basis. A mountain of previous miscues may be too much to overcome.
