What recession? What bear market?

Most retail stocks now trade at levels seen before the market crashed last fall. But more impressive are the stocks that trade at levels above prices seen when the recession began in the fourth quarter of 2007.

One such stock is Bed Bath & Beyond (BBBY). The big box general home furnishing chain traded for $30 per share at the end of 2007. Today, after a once in a lifetime economic collapse and near disaster, shares trade for $40.

How in the world could a company tied so tightly to the consumer and even more tightly to a housing market that is in shambles trade at such levels?

The simple answer is that the collapse of fellow big box competitor, Linens & Things, allowed the company to maintain revenues and profits at a time of difficulty for other retailers. Bed Bath & Beyond did not skip a beat.

But that simple answer is that it does not fully explain the success of BBBY. Though the elimination of a large competitor is a positive, there are plenty of places to buy home furnishings in the market.

Do you not think that Wal-Mart (WMT) and Target (TGT) are viable options for consumers looking for linens?

It is no different that the race to capture customers of Circuit City. Sure Best Buy (BBY) increased traffic as a result of Circuit’s demise, but so, too, did the discount retailers that longed to capture a piece of the higher margin consumer electronic market.

Bed Bath & Beyond’s Growth Goes Beyond Losing a Key Competitor

Something else is going on here with BBBY.

For starters, the company has been remarkably adept at being able to cautiously expand, while keeping costs in check. Even as it cut back on advertising and other costs in the recession, BBBY was able to self-fund the addition of new stores to its Buy Buy Baby, Christmas Tree Shops and Harmon Face Values subsidiaries.

The company has also been smart about generating more dollars for each square foot of space than competitors. At the end of the last fiscal year, that number was $225 per square foot. By comparison, Pier One, dangerously close to being put out of business, generated $120 per square foot.

How does Bed Bath & Beyond do it? By being strategic and smart. It is adding a Harmon Face Values health and beauty department to key Bed Bath & Beyond locations and is testing a natural food and product market in its Manhattan Bed Bath & Beyond. The company is also expanding its gift registries, improving its web site and remodeling stores.

With successes in these areas, BBBY has the balance sheet flexibility to ride out a deep recession. The company is debt-free, with nearly a billion dollars of cash and marketable securities. No need to dilute shareholders here. BBBY can self-fund its expansion.

No wonder investors are excited about BBBY, but is all that excitement already priced into shares?

BBBY Is a Good Company, But Is It a Good Stock Price?

At $40, BBBY trades for more than 20 times current estimates of $1.79 per share in earnings. Analysts expect that $1.79 to increase to $2.04 in the fiscal year ending February, 2011.

That means investors are paying a premium valuation for barely double-digit growth. No doubt BBBY deserves a premium valuation based on navigating a challenging economic environment, but shares are essentially priced for perfection.

As we know, corporate performance is often far from perfection. The only way BBBY can appreciate in value is to garner an even larger premium valuation or by generating profits that greatly exceed expectations.

BBBY has beaten expectations by a wide margin in the last two quarters. That is likely to continue today when the company announces fiscal second quarter results after the close of trading.

Investors are indeed willing to pay for growth, thus it is likely BBBY will see multiple expansion. Put a 30 multiple on what I think will be closer to $2.00 per share current year earnings, and the stock is valued at $60 per share.

There is no home-run potential in BBBY, but steady growth is not a bad outcome for current investors. I would hold this stock as the market continues to improve.