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Best Stocks for 2021: Bed Bath & Beyond Faces Key Test Going Into Q4

Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2021 contest. Bret Kenwell’s pick for the contest is Bed Bath & Beyond (NASDAQ:BBBY) stock.

It’s been a wild year for Bed Bath & Beyond (NASDAQ:BBBY). It certainly has not been a year that I had expected. Shortly after selecting BBBY stock as my best stock of the year, it went on an explosive run to the upside. That’s as the Reddit rallies, meme stocks and every other strange nickname being used triggered a massive move to the upside.

The logo for the InvestorPlace.com best stocks for 2021 contest.
Source: by InvestorPlace

When we last talked about Bed Bath & Beyond, I said it was “more than a meme.”

With that in mind, I still believe that to be the case, as the company works toward improving its retail operation and boost its e-commerce and omni-channel shopping solutions. That said, the stock has not performed well in the last few months.

Overall, BBBY stock is down almost 70% from its June high. Admittedly, the stock “enjoyed” a robust — albeit, short-lived — Reddit rally at the time. However, the stock is now down 18% so far for the year after its latest earnings results, making it the second-worst company in the contest for the 10 Best Stocks for 2021.

So, can the company turn things around going into the fourth quarter? Let’s take a closer look.

Earnings Were Not Good

On Sept. 30, the company reported disappointing second-quarter earnings, missing on revenue and earnings per share (EPS) expectations. That’s despite the back-to-school season, which is more like back-to-college season for Bed Bath & Beyond. However, due to supply line issues and the novel coronavirus impact in select markets, the quarter was a disappointment.

However, the retailer essentially thrives in two quarters: Fiscal Q2 and Q4.

The company’s second quarter covers June, July and August — which just disappointed.

Remember, revenue is being pressured as the company pares off and sells underperforming brands. Management is laser focused on improving operations, and they are doing a great job under CEO Mark Tritton. So even though the most recent quarter doesn’t reflect it, the long-term goals are still on track.

Looking Forward

Case in point about management’s improvements? Analysts still expect earnings of 96 cents per share this year, a massive improvement from a year ago where it lost 98 cents a share. That’s despite analysts expecting an 11% dip in revenue, down to $8.2 billion.

But it gets better. In 2022 (fiscal 2023 for BBBY), analysts expect earnings of $1.62 per share — up almost 70% from this year — despite flat revenue growth.

Granted, these are just estimates and they can be wrong. Further, we’re not seeing revenue growth, which will bother some investors. But it should bother them a whole lot less when BBBY stock is trading at 16 times next year’s earnings estimates, while the bottom line is screaming higher and free cash flow is growing.

Last quarter, Tritton had this to say:

“During the quarter, we successfully launched our margin-accretive, customer-inspired Owned Brands and accelerated growth with our Digital First, Omni-Always focus. We are re-establishing our authority in home, recapturing market share and unlocking our full potential.”

The company’s realigned focus should help drive margins and profit — and it is — and eventually result in revenue growth too. This looks like a smaller-scale overhaul that’s shaping up more like Tritton’s previous employer, Target (NYSE:TGT).

Not to mention, Tritton & Co. are focused on returning capital to shareholders. From the conference call, “Program to date, we have repurchased approximately $600 million or 20% of our shares outstanding.” Previously, management said, “Over the same period, just two years later, our EPS will be three times higher given our disciplined capital allocation and share repurchase program.”

Bottom Line on BBBY Stock

Daily chart of BBBY stock
Click to Enlarge
Source: Chart courtesy of TrendSpider

I’ll be honest with you: It makes sense to sell BBBY stock when it undergoes a massive Reddit-related spike. The stock can often double or more in just a few days, so taking some or all of one’s position off the table is reasonable.

Nonetheless, with the post-earnings dip, Bed Bath & Beyond is now trading at a big discount. The silver lining here is that it could represent a low-risk buying opportunity — especially if it holds above $15. 

On the upside, let’s see if the stock can clear the 200-week moving average, then $18. Above $18 puts $20 in play, followed by the gap-fill area at $22.14.

There is a small-gap fill area at $15.38. However, I don’t want to see BBBY stock close below $15.

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2021/10/best-stocks-for-2021-bed-bath-beyond-faces-key-test-going-into-q4/.

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