My Mom asked me about Bed Bath and Beyond recently. She used to be a store manager there. She sold her stock a while ago (missed that big up swing) but thinks there may be a buying opportunity now. I also owned some way back and sold after a small gain, missing most of the big 2-3 year rally here.
Anyway, here is my analysis and response to her. (The spreadsheet I refer to is one based on Phil Town’s Payback Time book you should be able to find on his tools page here.)
BBBY looks like a good buy. They are in sound financial shape. I’ll save you the math, but here are some numbers. You can dig them out of the attached spreadsheet as well.
Earnings Per Share: 4.291
Earnings Growth Rate: 15% (Past 3 years has been 21%, analysts expect about 14-15% going forward. I usually take the lower of these.)
Average PE: 15
Min Acceptable Rate of Return: 15% (what we hope to make on our investments)
Margin of Safety: 50% (We want to buy $1 worth of a company for $0.50 just to be safe.)
Based on the above, the “sticker price” for BBBY is $64.37. That means, this is the true value of the company if you expect all of the numbers above to go on for the next 5-10 years (e.g. keep growing at 15%) and have a rational market. (FWIW Trefis has BBBY valued at $74.77. That’s the price they’ll show in Etrade in the research.)
The MOS price (we want to get a bargin) is $32.18. This is the “it’s dumb NOT to buy this company at this price” price. If you change the MOS from 50% to 25%, which you can do if you feel you have extra knowledge about the company to lower the risk of something surprising happening against you, the MOS price become ~$48.
So based on my #s the company is slightly undervalued (by about 20%) at $55.
Here’s a 3 year chart to see what’s happened lately.
So there was a nice uptrend channel for the past 2-3 years that has been broken toward the downside. This is a stock in recovery mode. The next level of support is at $50. Based on the chart, this stock will very very likely hit $50. If that supports well, it should develop from there into a new uptrend. With new resistance at $60, and the former trend line resistance back at $75-80.
So things to think about: The trade here isn’t to buy and wait for it to go up and sell higher. That’s what you do when the stock is within the channel like it was for the past few years. Now you accumulate stock as cheaply as possible and wait for things to turn around to sell. I guess another way to put it is that this chart tells you more about when to buy vs. when to sell.
I would buy no more than a 25% position now. Buy 25% more if/when it hits $50, and then if it drops below $50, buy at $40ish and $35ish. At that level, unless the company is about to go out of business the stock price will be a bargain and turn around eventually. (Kind of like the ZNGA at $2 buy and the NFLX at $60 buys.)
If it stabilizes at $50, then you can play that other 50% once it defines a new uptrend.
The one thing I didn’t talk about here is any news about the company. I haven’t heard anything and didn’t search the news while looking this stuff up. Did anything big happen to BBBY besides missing earnings this past quarter?
I may buy some of this too. I’ll let you know what I do.