Last Thursday, Oppenheimer upgraded shares of Bed Bath & Beyond to Outperform, with a price target of $71. The stock took off, and traded to a high of $59.95 on Friday before giving back 2.1% yesterday.
But one option trader used the profit-taking to buy calls. The biggest trade of the day was the purchase of 8126 March 62.5-strike calls for $0.41, which was done with the stock at $58.00. This is a bullish trade that will profit if BBBY is above $62.91 (8.5% higher) at March expiration.
The S&P 500 might be trading at multi-year highs, but shares of Bed Bath & Beyond are still well below their 2012 peak. The stock struggled in the fourth quarter due to decelerating sales growth that the company blames on declining sales of Green Mountain products, as they become increasingly available elsewhere, and competing products take market share. The shares have also suffered due to the earnings impact of the acquisitions of Linen Holdings LLC and Cost Plus. However, these should be temporary, and BBBY has a strong track record of maximizing synergies from acquisitions very quickly.
BBBY has proven they can deliver year-over-year revenue and earnings growth along with free cash flow, all while maintaining zero debt. Additionally, the retail sector has been strong for the past couple months, meaning that BBBY has room to play catch up. At current levels, some of the top-performing retail names are getting pricey, but BBBY trades at a 13.4 price-to-earnings ratio, generates $5.21 in cash per share, and has gross margins of 41%. Buying upside calls into weakness is a good contrarian play that could show a big return with little risk if Oppenheimer's analysis is correct.
Disclosures: I have not done anything with this stock, but if I were to make this trade, I'd only buy these calls with hopes of selling them higher prior to expiration. I definitely would not want to hold on to until they expire.
Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."