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There are a myriad reasons to avoid Bed Bath & Beyond (BBBY) stock, ranging from investor Ryan Cohen (whom many investors followed into the name) exiting his position to the fact that the company needs to seek financing as it burns through cash. But let's step back and look at the bigger picture.
The real risk is opportunity cost
Many of the market's blue-chip stocks are trading at huge discounts to their 52-week high, making the present a golden opportunity to add some of these names to your portfolio on the cheap. Why gamble on shares of an unprofitable meme stock when you can take your pick of great stocks with long-term track records of creating shareholder value at steep discounts?
The understated danger of investing in Bed Bath & Beyond here is simply the opportunity cost to your portfolio. You'll be investing in a lame duck with a long-term history of underperformance at a time when you can add some of the market's best stocks to your portfolio for extremely attractive prices.
Bed Bath & Beyond stock is down about 50% year to date, but this isn't simply a blip amid a long-term history of strong performance. Zoom out to a one-year, five-year, or even 10-year time horizon, and Bed Bath & Beyond shareholders have lost money over all of those periods.
Contrast this to a blue-chip stock like another home-related retailer, Home Depot (NYSE: HD), which is down 35% year to date. However, in Home Depot's case, this is just a speed bump amid a long track record for excellent returns. Home Depot shareholders have enjoyed gains of 67% over the past five years and a scintillating 346% gain over the past decade.
Home Depot has been a long-term winner, but amid the market sell-off, it now trades at just about 15 times earnings, which is about in-line with the broader market multiple and a discount to where it has traded historically. You can't value Bed Bath & Beyond in the same way because it isn't profitable and doesn't look like it will be profitable any time soon. Furthermore, Home Depot shareholders also enjoy a reliable dividend that currently yields just under 3%. Investing in Bed Bath & Beyond won't bring you any passive income, and that is unlikely to change any time soon.
Now, Home Depot is just one example of a long-term winner you could miss out on if you decide to chase a meme stock like Bed Bath & Beyond instead. How about a stock like Texas Instruments (NASDAQ: TXN), which yields over 3%, has a strong commitment to creating value for shareholders on a free cash flow per-share basis, and is a leader in a long-term growth market like semiconductors? This sector is having a rough 2022, but the world is going to need more computer chips for years to come. Shares of Texas Instruments are down about 20% from their 52-week high. But zoom out over the past five years, and its shareholders have enjoyed a gain of about 80%, and over the past 10 years, they've pocketed an incredible 477% gain.
Focus on long-term winners
Even just investing in an index fund would have trounced an investment in Bed Bath & Beyond. Consider that the S&P 500 has returned 47% and over 150% over a five- and 10-year periods, respectively. Obviously, the market is forward-looking, but Bed Bath & Beyond's prospects don't look much better over the next ten years than they were during the past decade. The company is burning through cash and may dilute shareholders by selling more shares.
Warren Buffet famously said that it pays to be "greedy when others are fearful." Focusing on long-term winners now can put your portfolio in a position for success when the market turns around. It's smart to be greedy with blue-chip stocks in a fearful environment like this, but pass on the shares of Bed Bath & Beyond.
