Bed Bath & Beyond's Bold Bet

In this episode of MarketFoolery, host Chris Hill talks with analyst Jason Moser about some recent market news. Boeing (BA -2.87%) is nixing 737 MAX production indefinitely. It'll hurt for a lot of the manufacturers involved, but Jason explains why this could be good for the company's long-term recovery and improvement...maybe. Meanwhile, Bed Bath & Beyond (BBBY) CEO Mark Tritton is making some sharp cuts to the management suite. It's possible he'll be able to turn the beleaguered retailer around. Plus, the guys answer a listener question about how to manage a portfolio with some very overweighted positions in it. Tune in to hear more.

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This video was recorded on Dec. 17, 2019.

Chris Hill: It's Tuesday, December 17th. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, the one and only Jason Moser. Thanks for being here!

Jason Moser: Happy to be here!

Hill: We're going to dip into The Fool mailbag. We have more executives on the move. But we're going to start with Boeing.

In January, Boeing is going to halt production of the 737 Max indefinitely. Now seems like a good time to check your portfolio and see if you own any shares of any company that is a manufacturer and they have Boeing as a major client. The ripple effect of this could be pretty big.

Moser: Yeah. It will be big. When we talk about the bigger-picture implications here, you're talking about a supply chain where there are somewhere in the neighborhood of a million jobs involved, more than 600 suppliers in that supply chain. There's clearly a lot of money at stake here.

Now, with that said, I agree wholeheartedly that this is the right move for Boeing to make. We were talking about this back in October on MarketFoolery. You and both agreed at the time that their desire to try to get this thing back online by the end of the year was borderline absurd. At least, it felt like it was rushed, and I couldn't figure out how they intended to do that, particularly when you're dealing with regulators.

Hill: I was going to say, you know who else agreed with us? The FAA!

Moser: And I think that makes sense. When you look at the short-term concerns, the profitability concerns of the business, that's fine, I get that. Those exist, and that's something they're going to have to deal with. But they basically have one shot to get this right. We talk a lot about conscious capitalism, and all of the stakeholders involved when it comes to investing. I think as time goes on, we're going to see more and more of this type of thinking bubble up to the top there. What I mean by that in regard to Boeing is, this is not just about profitability for this business. It's about that supply chain. It's about all those employees. It's about all of the lives, all of the people that will set foot on this plane in the coming years. You can't get that back. Once you start going down that rabbit hole, you can't get it back. So, for me, they have one shot to get it right. This is the smart thing to do. It is a good example of longer-term thinking at play. They have a lot of levers as a company to be able to deal with the financial challenges that will come with this.

Hill: I hope, for their sake, for everybody's sake, that they get it right this time. When I think back to when this whole story began, roughly a year ago, it reminded me a little bit of BP and BP's initial reaction to the Deepwater Horizon in this one regard. Initially, when some of the damages had been assessed, BP came out and said something to the effect of, "We've set aside," I believe the number was $6 billion to $10 billion, "to deal with this. Whatever the cost is going to be for our business and our shareholders, we think it's going to be $6 billion to $10 billion." And I remember we sat in the studio, we were like, "There's no way it's going to be that low." And in fact, the total bill for BP ended up being somewhere in the neighborhood of $65 billion. 

When I think back to the beginning of this whole thing, and Boeing's reaction -- even back then, the way they talked about the timing to get this back on track, it just seemed unrealistic from the get-go.

Moser: It does, it did. We're obviously seeing the proof of that now. I think they've taken somewhere in the neighborhood of around $10 billion in charges here dealing with this problem thus far. Certainly we've seen the news with Southwest. I think that's the largest customer of Boeing and this plane.

It's something that's going to take a while to recover from. I feel comfortable saying it's going to cost a lot more than they're probably assuming today. I don't think that means it's going to be fatal for Boeing. I think, honestly, Boeing's not going anywhere. I think that, as far as timing goes, it's proving that taking a bit of a glass-half-empty approach here for investors is paying off. I just don't see any reason to rush back into something like this, feeling like maybe all the bad news is finally out there. But, as they're able to recover from this -- I think it's going to be many, many quarters. I don't think it's going to be something where we can see turnaround here in the in the next quarter or two. Again, go back to all of the resources that the company has to be able to deal with this. The levers they can pull, whether it's issuing additional stock, whether it's issuing additional debt. They paid, over the last 12 months, $4.5 billion dividends. I'm not saying they have to cut the dividend, but they could if they wanted to. That would be another way to deal with this problem in the short run. I think that being able to do that, it changes their value proposition a little bit with their customers as well. Southwest certainly goes to the table feeling a little bit more power, a little bit more bargaining power, after all of this is said and done. That plays out, certainly, on the bottom line as well. But let's not assume that there won't be innovation from here and a better plane that comes from all of this as well. That could help right the story for Boeing years down the road.

Hill: Proving that investing can be hard sometimes, or, certainly, predicting stock moves can be hard. Over the past year, shares of Boeing are up slightly. I'm surprised they're not down, period. I'm surprised they're not down significantly. I also look at Delta Air Lines, which is up over the past year. I'm surprised Delta, which does not fly any 737 Max planes -- and on the quarterly conference call, they seem borderline giddy to not have to deal with those questions. That stock is up over the past year. I'm surprised it's not up more.

Moser: Airlines are a tough place.

Hill: Clearly, my knowledge of airlines is pretty limited.

Moser: It's a tough business. There's a rocket science pun in here somewhere, I'm sure, but at the end of the day, this really isn't rocket science. They do provide just a commodity service. They're in the business of getting people from point A to point B. There are some loyalists, and certainly, airlines do work with other partners to be able to provide attractive rewards, memberships that help to breed some customer loyalty. But it is, at the end of the day, a commodity service more or less. So I think it's really difficult, from that perspective, to invest in airlines.

With Boeing, it's worth noting, the stock, while it is up a little bit over the last year, it's down significantly from some of the highs earlier in the year as this news started shaking out. I think there was a lot of optimism early on because this really was supposed to be Boeing's biggest success story to date. This really was going to be just one of the things they could hang their hat on and say, "Look what we just did. One of our greatest success stories ever." And now it's turning out to be really the complete opposite. So, there is some pullback from where the valuation was before. I think there was a lot of enthusiasm in that valuation that's since been removed.

But the market's not stupid. We're talking about the levers they can pull to deal with this. The greater market knows that this company has those levers as well.

Hill: Shares of Bed Bath & Beyond are up 7% this morning on the news that the company is replacing six senior executives. Mark Tritton, who is the CEO -- I would add parenthetically, he's been the CEO for about six weeks.

Moser: Not very long.

Hill: Tritton says the move is going to streamline Bed Bath & Beyond's decision-making. I would think so. [laughs] If a bunch of executives just walked out the door, at least in the short term, this is seen as, "OK, you're the new CEO. It's your way. We'll take the highway." At least for one day, the market is betting on Mark Tritton.

Moser: It's like the president of a homeowners associations dream, right? Typically, the president of the HOA has to deal with getting all of these neighbors together that never want to be in the same place at the same time. You can't get everybody to vote. And then there are all these issues on, how do you record votes? Can we do it online or does it have to be in person? You just can't get anything done. So, when everybody leaves the board, finally the president can just start calling the shots and getting stuff done. Maybe that's where we are with Bed Bath & Beyond. Extensive problems require extensive solutions. This is certainly one way to get that ball rolling. It does sound like he wants to fill some of those positions. He wants to consolidate some of those positions. That's good, too.

We've recorded the challenges of Bed Bath & Beyond on this show for many, many years. It's just been an awful investment story for a number of different reasons. I don't think there's any reason to expect that to change anytime soon.

Now, that said, I do believe there is a world where a Bed Bath & Beyond still has a place. I do think that people out there, generally speaking, want and need a lot of the stuff that Bed Bath & Beyond is selling. I think they have a bloated store footprint. They need to trim that down a little bit. They have a lot of debt on the balance sheet they still need to deal with. I'm not sure that paying a dividend at this point really matters as well. If they cut it, I think the market would probably receive that as good news as well. It probably makes sense to completely stop share repurchases altogether. Remember, it's one thing to repurchase shares when you believe there's a fundamental misunderstanding regarding the business and the stock price. In this case, there is no misunderstanding. The business sucks, and the share price reflects that.

But, listen, Tritton's got a good track record with Target. I'm sure he learned a lot from there. He's going to put a lot of his lessons into practice here at Bed Bath & Beyond. Color me cautiously optimistic. I'm hopeful, at least. I'd love to see this thing turn around.

Hill: I'm certainly more optimistic about Bed Bath & Beyond than I am about GameStop. And yes, part of that is the rant that Aaron Bush went on on Motley Fool Money last week. It was a very measured rant, and backed up by a lot of sound analysis and reasoning. But, everything you just said about Bed Bath & Beyond, you can multiply by four or five and apply it to GameStop. Like you said, there's no reason -- I made the joke about decision-making being easier, but it really does seem like Tritton has bought himself some time. He's bought himself at least six months to put together a plan. Hopefully that plan is going to involve at least some measure of store closures. Whether Tritton is the CEO or not, you can't make a sound argument that they have all the stores they need, and in fact, they need to open more.

Moser: Yeah. Listen, I'm no CEO, and I'm not saying that everything I'm saying here is right, but it does seem like there's a lot of low-hanging fruit out there that they can do, that they could move forward with in order to try to make this business, at least to get in a little bit of a better position. It doesn't take a lot. Again, you cut the dividend with a company like this, I don't think the market actually would react negatively. I think they'd probably view that as a positive and say, "We get it. You're in a tough position and you need that capital and you've got some debt in your balance sheet."

It's a unique position they're in. We've seen retailers in this position before. Probably a coin flip at this point as to whether it works out or not. But I like the way he's getting started.

Hill: Our email address is [email protected]. Question from Colby in Seattle who writes, "I have one stock that sits at 40% of my overall portfolio. It was the first stock that I bought." I would end parenthetically, it's Netflix. "I've since bought additional stocks and ETFs to add to my portfolio. Should I continue to acquire more positions in other stocks and ETFs to further dilute my heavy 40%? Or should I look at selling some of it off to create capital for additional stock purchases?"

Thank you for the question, Colby. It's a great question. One we've gotten in one form or another before. It's a good problem to have this. "This stock has crushed it so much, it's overweighting my portfolio." I will just say, in my own experience, when I've run up against this situation before, I have not looked to sell off the dominant stock in my portfolio. I have looked to figure out a way to add money to my portfolio, buy more positions in more companies.

Moser: Yeah, I tend to agree with that. I really love being able to hang onto winners and let those winners keep going. Netflix has been a polarizing investment for a lot of people. At the end of the day, though, I find it very hard to argue with the company's dominance in the market that it serves. I think it's a great business, run by a very smart leader in Reed Hastings. The economics are a bit challenging at times. I wonder how much they're going to be able to raise prices on the memberships there. But, you flip that coin over, and you look at how many potential subscribers there still are out there in the world. They could certainly grow that subscriber base considerably from today's levels.

You can further diversify. I would rather use the term diversify as opposed to dilute, because I think diversify is maybe a bit more of a positive word to use there. You can hang onto that winner and keep on adding to other positions and new positions. That would reduce your reliance on that Netflix position so it's not quite 40%. Just keep investing in other ideas, and Netflix becomes not quite as meaningful based on the original capital that you've invested.

Now, I mean, if Netflix doubles from today, you're probably asking this question and that's a nice problem to have, like we said. But, again, I think you've got a business that is performing very well. It's got a long track record of success. I don't like selling those if I don't have to. I also understand, if people look at them, they think 40% is an awful lot and I'm not comfortable with that. But if you're able to sleep at night, if it's something that you're not losing sleep over, I would try to hang onto that thing as long as you can and see if you can't diversify away into other ideas. It could certainly be argued that right now, Netflix is selling it a little bit of a discount to what we think, perhaps, the future holds for it.

Hill: Jason Moser, thanks for being here!

Moser: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.