Bed Bath & Beyond may be heading for a ‘meme squeeze’

Despite the company’s problems, Bed Bath & Beyond’s stock ended Tuesday’s session up 19.4% and went on to enjoy its biggest percentage gain ever on Wednesday. The stock is up 12.5% Thursday, outpacing the S&P 500’s
SPX,
+0.34%
gain of 0.02%.

Related: Other businesses will feel the impact of Bed Bath & Beyond store closures, says bankruptcy expert

“We have not seen a [Bed Bath & Beyond] short squeeze in 2023 prior to today’s over +50% price move, but if the stock continues to rally, we could see some near-term short sellers exit their positions and begin to pocket (realize) the profits they earned in 2022,” wrote Dusaniwsky, S3 Partners’ managing director of predictive analytics, in a note released Wednesday. “Of course, the crucial difference between [Bed Bath & Beyond] and other crowded shorts is that there is a definite threat of bankruptcy, which could embolden shorts to hold onto their positions, incur some temporary losses, and wait out this rally in anticipation of a $0.00 stock price in bankruptcy.”

In the note, Dusaniwsky said that Bed Bath & Beyond’s short interest is $82.7 million, or 39.93 million shares shorted, accounting for a 52.07% short-interest float. Bed Bath & Beyond has the second largest short-interest percentage float for stocks with over $10 million of short interest in the U.S, second only to Silvergate Capital Corp.
SI,
+12.89%,
according to S3 Partners’ research.

Shorts have been active in Bed Bath & Beyond, with 25.1 million of new short sales since it hit its 2022 early year high of $27.23 on March 29, according to S3 Partners. This is an increase of 169% in total shares shorted as the company’s stock price crashed 91%. Over the last 30 days, S3 Partners saw 3.8 million shares of new short selling, an increase of 10.4% in total shares shorted, as the stock price slumped 33%.

Also read: As specter of bankruptcy looms over Bed Bath & Beyond, what’s next for the troubled retailer?

“[Bed Bath & Beyond] has become less institutional and more retail on the long side with large institutional activity on the short side,” wrote Dusaniwsky, noting that the vast majority of short selling is done by institutions. “This mix makes for a volatile stock since fundamentals are not the primary driver of price moves — the stock is becoming much more of a momentum and technical name — outsized and sudden price fluctuations will not be out of the ordinary.”

Analysts see the specter of Chapter 11 looming large over the retailer. Last week’s announcement that the sometime meme-stock darling may need to declare bankruptcy sent Bed Bath & Beyond’s stock sinking toward a 30-year low and followed a turbulent few years marked by strategic missteps, cash burn, challenging underlying business trends and the impact of the COVID-19 pandemic.

Now read: Bed Bath & Beyond bankruptcy warning marks latest chapter in troubled retailer’s downward spiral

If the threat of bankruptcy becomes more of a certainty, a Bed Bath & Beyond short squeeze becomes less and less likely, with minimal short covering as short sellers wait for a $0.00 stock price, according to Dusaniwsky. But if bankruptcy is not in the future, the company’s rallying stock price will force a massive short squeeze and short sellers will rush to the doors and buy to cover in order to retain some of the mark-to-market profits they earned in 2022, he added.

Dusaniwsky characterized the situation facing Bed Bath & Beyond’s stock as “very binary” in a phone interview with MarketWatch. “Either you have a meme squeeze where the retail investors push the stock up, [and] the squeeze will force the short-buying covers to push the stock up even further,” he said. “Or the stock goes into bankruptcy or there’s a low-priced takeover offer.”

Of nine analysts surveyed by FactSet, three have a hold rating and six have an underweight or sell rating for Bed Bath & Beyond.