The usual modus operandi of the activist investor is simple: Locate a company that's being poorly run, figure out what it could be doing better to "unlock its value," and then leverage a stake in the company to convince management to try that strategy. Last week, three activist investing firms got together to take matters up a notch with Bed Bath & Beyond (BBBY). The opening step of their plan is to replace the CEO and the entire board of directors. The stock, in response, shot up 25%.
In this segment from MarketFoolery, host Chris Hill and analyst Abi Malin consider the positives of what these investors bring to the table, the impact short-sellers had on the stock move, how the retailer got into its current situation, and what it would take for new management to guide it back to health.
A full transcript follows the video.
10 stocks we like better than Bed Bath & Beyond
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Bed Bath & Beyond wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of March 1, 2019
This video was recorded on March 26, 2019.
Chris Hill: Let's move on to Bed Bath & Beyond. Shares are up more than 25% this morning. Three activist investor groups are gearing up to [laughs] replace the CEO and the entire 12-person board of directors. I should point out that these three activist investor groups collectively only own about 5% of the stock. I don't know, it's enough to at least get some people scared.
Abi Malin: I think it's worth noting, though, that with Bed Bath & Beyond, about a third of their stock was sold short previously. A lot of that 25% bump is probably short-sellers getting squeezed and trying to jump out. It's still interesting, I agree.
Hill: I don't own shares here, but I like when, whether it's a business leader of a company or activist investor groups, I like it when they take big swings. There's not many swings that are bigger than, "All of you need to go."
Malin: [laughs] "We don't like any of you."
Hill: "We don't like any of you. We don't like the CEO, who's been running this company since..."
Malin: 2003. That's a pretty long tenure to say, "Time's up."
Hill: Well, and I think if the track record for Bed Bath & Beyond were better, it might be like -- because typically, the move is, "We're looking for some seats on the board." No, in this case, they're looking for all of the seats.
Malin: Also, I thought it was interesting, they mentioned that they're looking to align executive compensation with performance. That's something we at The Motley Fool do look at and value a lot. I appreciate that. From a shareholder perspective, I think that's a very admirable goal.
Hill: Also, and I've said this before on the show, I do think that there's underlying value to Bed Bath & Beyond. I think it has not been well-run, and certainly, bricks-and-mortar retail has had a rough go of it. But they're selling stuff that everybody needs. It's not like they're selling this esoteric, weird stuff -- or, for that matter, that they're in a business that is large purchases that are made once every 10 years, once every 20 years. No, this is stuff that everybody needs.
Malin: Right. I think it's interesting, in the goals, these activists mentioned a lot about how they saw missed opportunities with customers buying more online. Bed Bath & Beyond's been late to that game and definitely delayed in terms of user experience and things like that. Also, costs have crept up. You have overcluttered stores; the stores are a less appealing place to go. Online, they haven't really had that option at the degree that, say, Amazon has. I just think it's a competitive space.
Hill: I think back to 2012, 2013, when Best Buy was struggling. Another bricks-and-mortar retailer. Hubert Joly comes in as CEO. He and his executive team turn that business around in part because they invested in online, they remodeled the locations, made them just a much better in-store experience. The last time I went to a Bed Bath & Beyond...yeah. And I don't get claustrophobic, but they're a little claustrophobic in there. They could do with a makeover.
Malin: Yeah. Activists also want to sell some of their underperforming assets -- Buy Buy Baby and Cost Plus World Market, they want spin those off and unlock value there, which I think is another commendable strategy. I don't necessarily see those in line with what Bed Bath & Beyond is really aiming to do.
