Bed Bath & Beyond gets two downgrades as analysts say take profits during speculative pop

Published Tue, Jan 26 20218:49 AM ESTUpdated Tue, Apr 20 20214:05 PM EDT

Bed Bath & Beyond received a pair of downgrades from Wall Street analysts on Tuesday, advising clients to book profits after a major rally in the stock sparked by retail investors buying beat-up retail names that hedge funds are betting against. UBS downgraded the retailer to sell from neutral and Raymond James slashed its rating to market perform from strong buy. However, shares of Bed Bath & Beyond rose more than 20% on Tuesday as the retail frenzy continued. "With BBBY shares up 73% YTD, our call is to take profits," UBS analyst Michael Lasser told clients. "With the environment roughly the same, the recent stock surge is more a result of a short squeeze against highly shorted retail names (see GME and AMC)," Raymond James analyst Bobby Griffin told clients. "While predicting when this activity will end is challenging, we think it is prudent to take a breather on our positive rating." Shares of Bed Bath & Beyond rose as much as 40% on Monday as individual investors deliberately bought up shares of the embattled retailer, forcing hedge funds to cover their losses from shorting the stocks . With 64% of its float shares tied up in short bets, according to FactSet, Bed Bath & Beyond, along with GameStop and AMC Entertainment, became a popular target for rookie investors. Bed Bath & Beyond's stock is now up more than 70% this year alone, pushing it well above its retail peers, despite still being in the early stages of its turnaround. "BBBY's recent performance over the past few weeks stretches its valuation and creates a far more balanced risk/reward set up over the next few months. Specifically, BBBY is up ~73% through the first ~15 trading days of 2021, without any meaningful change in the retail environment or fundamentals of the business," said Griffin. While Bed Bath & Beyond only closed up about 1.5% on Monday, Bed Bath & Beyond is now trading at a 25 times earnings, significantly higher than its 5-year average of 9 times. "One can justify the stock trading at a premium valuation if there was more proof of its progress," said Lasser. "The recent move has tilted the risk-reward to the downside. The shares will eventually face stiff resistance from turnaround that probably won't deliver linear progress. The challenges at BBBY are deep & will take time to fix," Lasser added. Raymond James echoed this sentiment and said the stock's level does not justify moving its target price higher to maintain its strong buy rating. However, both firm's are still bullish on Bed Bath & Beyond's turnaround story in the long-term. "Our change in opinion is not a reflection on Bed Bath & Beyond's turnaround potential," said Griffin. "We continue to believe that the new management team understands the core issues within the business and has already started to show progress in recent results." "While we believe there is room to improve Bed Bath's ops, merchandising, pricing, sourcing, supply chain and store base, we think a portion of the savings that can be realized will need to be invested back into the business to drive traffic," said Lasser. — with reporting from CNBC's Michael Bloom.

Shoppers exit a Bed Bath & Beyond store in New York.

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