During the first half of 2022, shares of Bed Bath & Beyond (BBBY) lost two-thirds of their value, as the home furnishings chain's sales tumbled, leading to big losses.
However, the meme stock craze has brought Bed Bath & Beyond stock back to life this month. After ending July around $5, the shares have more than tripled so far in August, closing at $16 on Monday.
This meme stock rally represents a great opportunity for Bed Bath & Beyond shareholders to cut their losses (or even pocket some gains!) and sell. The short squeeze driving this month's rally won't last long. Once it peters out, Bed Bath & Beyond stock will probably give up most of its recent gains.
Another classic short squeeze
In recent years, Bed Bath & Beyond stock has been a popular target for short-sellers, because of the company's persistent market share losses and plunging profitability. Over the long haul, short-sellers have made a lot of money in this stock: Bed Bath & Beyond's share price peaked around $80 in early 2015, and the stock has mostly gone downhill since then.
That said, high short interest has made Bed Bath & Beyond stock prone to periodic short squeezes, particularly in the past two years. When a heavily shorted stock goes on a tear, in can create a self-reinforcing rally as short-sellers are forced to buy the stock to close out losing positions, pushing the price even higher.
There were over 29 million shares of Bed Bath & Beyond stock sold short as of late July, accounting for 36% of the company's 80 million outstanding shares. As a result, a recent rally in meme stocks has triggered a short squeeze in Bed Bath & Beyond stock, driving this month's 218% surge.
No reason to expect fundamental improvement
Importantly, Bed Bath & Beyond hasn't released any significant news to support the recent rally. Earlier this month, Bloomberg reported that the company is considering private loans to bolster its liquidity, but that looks more like a sign of desperation than a sign of strength. And while inflation started to ease in July, it remains very high by contemporary standards, so rising costs for essentials will probably continue to crimp discretionary spending.
In short, the factors that caused Bed Bath & Beyond to record a 25% sales decline and a big loss in the first quarter haven't gone away. Analysts expect the iconic retailer to continue losing money for the foreseeable future, as many customers are either defecting to more convenient rivals or cutting back on home-related purchases altogether.
With Bed Bath & Beyond's underlying business still in shambles, investors can't expect the stock's recent rally to last very long. While the current short squeeze in Bed Bath & Beyond stock is the biggest since January 2021, the stock has experienced numerous short squeezes over the past two years. Each time, it has surrendered most or all of its gains within a month or two.
There's no reason to expect a different outcome this time around. From a long-term investing perspective, the only good thing about this month's rally is that it might give Bed Bath & Beyond a chance to raise capital by issuing new shares. The company needs a cash infusion of at least $500 million (and probably more) to fund near-term losses and invest in turnaround initiatives. With a market cap of nearly $1.3 billion today -- up from $400 million a month ago -- it might be possible to raise that sum in an equity offering.
However, an equity offering would dilute existing shareholders' interests in Bed Bath & Beyond while making it easier for short-sellers to close their positions. Thus, it might prevent the stock from falling all the way back to last month's lows, but it would make it even harder for the share price to remain at today's elevated level.
In short, investors shouldn't get greedy with Bed Bath & Beyond stock. While the stock could continue rising in the near term, the gains are unlikely to prove durable.