What's Going on With Bed Bath & Beyond?

Bed Bath & Beyond (BBBY) shares fall more than 25% on falling store traffic and "pervasive" problems with the supply chain. Matt Argersinger, lead investor for Millionacres (The Motley Fool's real estate investing service), analyzes those stories and shares how he's learned to embrace the volatility of months like September.

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This video was recorded on Sept. 30, 2021.

Chris Hill: It's Thursday, September 30th. Welcome to Market Foolery. If la grande you would like someone to wake you up when September ends, good news, the end is finally here. I'm Chris Hill. With me today, [laughs] first time in a while, Matt Argersinger. Thanks for being here.

Matt Argersinger: Happy to be here, Chris. Thanks.

Chris Hill: This has not been a good month and we're going to talk about that.

Matt Argersinger: I love you have me back on when there's bad news in the market. I'm grateful for that.

Chris Hill: That's not why I have you on. I wanted to talk about home prices and that's what we're going to talk about first because I've talked to you a couple of times over the summer on Motley Fool Money. The first time was early May and I remember we recorded the interview earlier in the week, a couple of days before the show. Then over the next couple of days when I told people I had interviewed you, everybody had the same question, which was essentially, what does Matt think about home prices? Home prices are crazy. What did he say about that? In some cases, it was people that we work with who were looking to buy a home and the market they're in is crazy and they're like should I hold off for a few months? I told everyone that I'd asked you that question and you basically said, ''No, this isn't cooling off anytime soon.'' The other day we got the latest data that you were right, home prices in July up nearly 20 percent on an annual basis and this really shows no sign of cooling off. There are a couple of things I want to get to, but I guess my first question is when the data came out, I'm assuming you were not surprised, did anything stand out to you in terms of what we're seeing right now in terms of the latest data we have on home prices?

Matt Argersinger: Well, I think I was a bit surprised. I've been expecting the whole market to stay strong as we've talked about. But the sheer size of the increases have been pretty impressive. Twenty percent July, that's coming off of almost 19 percent increase in June. July, by the way, was the fourth consecutive month of record price appreciation. If you click further into the details, some of the markets in there are just incredible. Look at Phoenix. Home prices there are up 32 percent year-over-year. San Diego, up 28 percent, Seattle, up 25 percent. These are extraordinary moves. Now, you have to look back and say, well, we are year-over-year from 2020. The spring summer portion of 2020, that was little bit depressed with what was going on with COVID-19 and then of course the whole market just really boomed in the fall of last year and we really haven't stopped since. We're getting some nice year-over-year comparisons there. But while this makes you happy as a homeowner because you're seeing the equity in your home can continue to rise, that's got to be a great feeling, if you're looking to buying a house or gosh, you are a first-time home buyer, which I feel really bad [laughs] for this market, it's got to be scary to see these increases, especially in a lot of the markets where people are willing to buy a home like a lot of hot markets that we've talked about.

Chris Hill: One of the things we're going to talk about in a little bit is the global supply chain challenges that are going on affecting so many different industries. To what extent is it hitting the home building industry?

Matt Argersinger: Yes, that's a great question. It's certainly hitting it. You've seen last year where there was lumber prices, those have come down a little bit, but iron ore prices, cement prices, labor prices all higher, and haven't really come down at all. That's affecting home builders. You've seen a lot of home builders pull back from the market, not build as many homes as they're planning, waiting for those costs to come down before they make commitments to home buyers. It's absolutely having an effect, it's affecting developers of multi-family, so big apartment buildings. It is playing a big role in housing and we talked about supply in the housing market. 

Now the good news is, I was looking at FED data this morning and the supply of homes is finally rising. We've talked about this acute supply shortage in a lot of markets where homes are selling in less than a week and there was just such a low inventory of homes. Well, thankfully, the supply of homes is coming back to the point now where there's actually almost a six-month supply of homes as of August, and that's close to where we are historically. I do think if you're looking to buy a house or you're a first-time home buyer, the situation is going to start leveling out. That doesn't mean the prices are going to be coming down necessarily to make homes more affordable, but I do think the situation is plateauing a little bit.

Demand is still there, but at least the supply is coming up to meet that a little bit. Then if the supply chain issues, which we're going to talk about more, but if those get resolved a little bit going into 2022 for home builders and the development companies, then we should finally see a little bit of a break in the price. What is interesting though, Chris, is that we talked about the home buying and home selling, but some of the numbers on the rental side are just as crazy. Whether you're talking multi-family or single-family rentals, rents are up double-digit year-over-year in a lot of places. Invitation Homes is a REIT. It's the leading single-family rental company that I follow up pretty closely. On new leases that they signed in the second quarter, renters were paying 24 percent higher rents in Phoenix, 22 percent higher rents in Vegas, 16 percent higher rent in Atlanta. Not only are you getting sticker shock as a home buyer, you're getting sticker shock as a renter. We can only hope that hopefully, these supply demand imbalance across the whole market gets settled over here pretty soon.

Chris Hill: We're going to move onto the stock of the day, which is Bed Bath & Beyond. Unfortunately, it is the stock of the day because shares are falling more than 25 percent this morning. The company's management said traffic in August was much lower than expected. Second quarter results are not going to be good and Bed Bath & Beyond's CEO, Mark Tritton, said the supply chain problems have been "pervasive." We've heard all about the semiconductor chip shortage, how that's affecting so many different industries, I guess I didn't think of Bed Bath & Beyond. Not that I thought that they would be impervious to supply chain problems, but holy cow, this is quite a hit they're taking.

Matt Argersinger: Big time hit, and I think you and I will both agree that Bed Bath & Beyond has a lot of longer-term issues that are well known. It's a symptom of a larger problem. We have too much brick-and-mortar retail in the US. There has been a major shift to e-commerce that's been going on for decades at this point and it was accelerated big time by COVID-19. But I think in the short-term, you have a situation where retail traffic was actually bouncing back finally in late spring early summer. Vaccines had come out, people were getting a little more confident of going out and shopping. We actually had record retail sales, if you remember back in the spring and in fact, traffic to shopping malls was almost back to pre-COVID levels by the summer. I think the major problem before we go to the supply chain issue that we have is Delta variant issue. Not only what that's done to retail traffic over the past few months, but what's it's actually doing to office traffic as well because I think it's important to remember that if people aren't going to the office or commuting to work or taking kids to school, they're also not eating lunch at restaurants or shopping in stores on the way to and from work. 

I think the Delta variant has also slowed the velocity of the US economy down quite a bit and I think that's also contributing to lower sales. But then, yeah, let's get to the supply chain issue. I think the demand is certainly there on the consumer side. But we still have factories that are operating at lower capacity, we have labor shortages, we have shipping bottlenecks. This was remarkable to me. I spoke with a woman who owns a small toy shop here in Middleburg, Virginia where we live. This was back in July and she was panicked at the time because she was fairly certain that all of our Christmas orders she was making for her store were not going to make it in time. That is back in July. The data I'm seeing suggests that the supply chain issue has not been resolved. You have a big problem again, it's like demand and supply. It's like what we've been talking about [laughs] for the whole show here. I feel like the retail demand is back, at least in the short-term, but the supply issue remains a big problem.

Chris Hill: Seeing here, I was thinking that this was going to be a good holiday season for local businesses because people were going to be doing more local shopping just cause the larger chains, were the ones that were going to suffer more from supply chain issues.

Matt Argersinger: Yeah but if anything, I think the big chains can monopolize the supply chain in a way that hurts the mom-and-pop stores as well. We often think that yeah, the local mom-and-pop store, maybe it's locally supplied, maybe they do their own manufacturing, most of the time it's not the case. There are dealing with the same supply chain issues and in most cases they're paying higher-cost to do it than some of the bigger chains. They're getting hit just as hard. Unfortunately.

Chris Hill: I mentioned earlier, it hasn't been a great month for the stock market. I think the Nasdaq has and the S&P 500 will both finish down maybe four percent for the month. Which on the surface isn't horrible. But we've had a couple of exciting days this month. Let's just put it that way. [laughs] I was looking at your twitter feed and wanted to ask you about something that you tweeted, Monday, September 20th, about an hour before the market closed. You tweeted, this is starting to get fun. [laughs] What did you mean by that? Because I'll just for context, the S&P 500 fell nearly two percent just on that Monday. What was your mindset when you're like, OK this is starting to get fun.

Matt Argersinger: I didn't mean for my tweet to come across this flipping because I know market volatility it's often not fun, especially with a lot of the stocks you want to taking big hits. A lot of mine certainly have over the past month and I think a lot of work in crush that day, so I was feeling pain too but if I'm perfectly honest, I like the stock market has been boring for the past several months. [laughs] This is just how I personally approach to the stock market. I tend to buy a bunch of stocks at once, several times a year. I've been waiting for there to be some volatility. Just a quick example, a one company that's been on my watch-list for a while is a company called Sun Communities, the ticker's SUI and they are the leader in manufactured home and RV communities. It's a great business, awesome track record, and a stock has just been on an absolute tear. I just think the trend toward, if you look the need for affordable housing in the country, and they are a leader in manufactured homes in RV communities. They are right in that zone. But the stock recently hit $210 I've been watching it. But with the recent volatility, I see the stock price down below 190. Not a huge price break, but that's something that starts to look interesting. That's my approach I tend to get, and this is The Motley Fool ingrained me for many years as I tend to get little giddy when I see the market being very volatile, I see stocks that I'm following even stocks that I own already when I see them coming down and I want to add to them, that starts to get a little fun for me. When I see that September was a little bit of rough month, but I think it's something we haven't seen a lot of, at least since last spring. Volatility is a friend as we talked about often, and especially if you've got a bunch of high-quality companies on your radar that you've been wanting to buy or add to. Seeing them come down on prices is usually a fun thing. It should be.

Chris Hill: It should be and I was thinking about this earlier. For the overwhelming majority of my investing life, that was not my mentality or I should say, embracing volatility as an opportunity. That was not my mindset. I was much more of the approach of like this is not a good day, looking at my portfolio and seeing already, as opposed to looking at the stocks on my watch list and seeing this is now 10 percent lower than it was a month ago. I can buy it now with a 10 percent discount. All of which to say for newer investors, or even more experienced investors who are still shaken by days like we had on September 20th, hanging in there because there is going to come a point where your mindset is going to shift slightly and you are going to see days like this. It took me a long time to get there but.

Matt Argersinger: It took me a long time as well, and I think one thing that took me even longer is the idea that it's OK to buy a stock at a much, much higher price than when you first bought it. I own a bunch of companies that I've added too many times over the years. Even though I might have bought the stock at $20 a share, if it's a $200 share price and it drops a little bit, I'm looking to add to it. I still feel good about that even though it's so much more than what I paid originally and that's the idea of investing in a great company overtime. You're buying it hopefully many times as it goes up in value. Can you take advantage of days like September 20th when you might get a price break on it. I think we need to be long-term accumulator leaders of stock, of good companies. That's what makes us foolish. Now there are times, of course, when we need to self, we need the cash down the road or things like that. But I love the stock market as you do I know. I look at it as there always opportunities and even more so when there is volatility.

Chris Hill: Matt Argersinger, great talking to you. Thanks for being here.

Matt Argersinger: Thank you, Chris.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based on what you here. Is going to do it for this edition of Market Foolery show is mixed by Rick Engdahl. Pawn loan for Motley Fool Answers and we'll break on Thursday with David Gardner. I'm Chris Hill. Thanks for listening. We'll see on Monday.