Of All the Meme Stocks, BBBY Is the Most Fundamentally Strong

The so-called “meme stocks” are back. Much as they did in late January, retail traders have banded together to drive up the stock prices of beaten-up, heavily-shorted stocks in late May and early June. Over the past month alone, Koss (NYSE:KOSS) stock is up 48%, GameStop (NYSE:GME) is up 49%, Bed Bath & Beyond (NASDAQ:BBBY) shares surged 50% and AMC (NYSE:AMC) is up a whopping 340%.

Bed, Bath & Beyond (BBBY) storefront with trees in front

Source: Shutterstock

Make no mistake. These short-term rallies are creating bubbles, because most of these companies are fundamentally weak, with bleak long-term growth prospects, and will never make enough profit to warrant their current valuations. After the near-term social momentum fades, most of these meme stocks will collapse.

Note the emphasis on “most.

There is one company in this crowd that is not fundamentally weak. It’s actually a fundamentally strong company, with improving long-term growth prospects and the realistic potential to earn more than enough profit to warrant an even bigger valuation down the road. This is the meme stock that fundamentally-oriented investors should consider chasing.

So, which meme stock is it? BBBY stock.

Here’s why…

BBBY Stock: There’s a Real Turnaround Playing Out Here

The big problem with meme stocks is that, while retail investors are busy talking about what the management teams at these struggling companies could do to turn their businesses around, not much is happening by the way of actual operational change.

That’s not the case with Bed Bath & Beyond.

There’s a real turnaround playing out at Bed Bath & Beyond, and it has the potential to dramatically improve the sustainability and operating performance of this business.

Here’s the story:

For years, Bed Bath & Beyond languished as an antiquated brick-and-mortar retailer that leaned heavily into discounts to drive sales. This tactic didn’t really work, serving instead to only erode profit margins. Then, a new management team led by the widely-respected Mark Tritton — who was the former chief merchandise officer at Target (NYSE:TGT) during its big turnaround — came in and changed everything.

The goal? Transform Bed Bath & Beyond into the preferred omni-channel destination for home goods.

Some of those changes included revamping storesrightsizing the real estate footprint and investing in e-commerce. The retailer has also built omni-channel capabilities like BOPIS (buy-online, pick-up-in-store), while significantly reducing its operating expenses and retooling the supply chain to improve its gross margins.

Those are big, meaningful changes. They’re also the right the changes — and they’re working.

Even amid the Covid-19 pandemic, Bed Bath & Beyond has rattled off three consecutive quarters of positive comparable sales growth. Before Tritton, positive comparable sales growth quarters never happened. Under Tritton’s leadership, gross margins are improving, digital sales are soaring and adjusted EBITDA dollars are rising.

Everything is trending in the right direction for this company — and that’s fundamentally bullish for BBBY stock.

Bed Bath & Beyond Stock Can Climb Much Higher

My estimates indicate that BBBY has the potential to climb above $70 within the next few years as the company’s big turnaround plays out.

The U.S. furniture and homeware market is expected to grow by 2% to 3% per year over the next few years. For years, Bed Bath & Beyond has seen its share of that market eroded by mismanagement of its business. The new management team should help the company stabilize its market share, leading to 2%-3% sales growth.

Gross margins should improve as its pricing strategies and demand improve and consumers use fewer coupons. Its operating-spending rate should fall as the company closes underperforming stores, invests in automation technology and leans more into e-commerce sales. Bed Bath & Beyond’s profit margins, therefore, should expand meaningfully over the next few years. Share buybacks will also factor into the equation.

If they do, then its 2% to 3% sales growth will translate into roughly 10% to 15% annualized profit growth after the pandemic. Based on that assumption, my modeling suggests that Bed Bath & Beyond is on track to generate earnings per share of about $5 by 2025, in a best case scenario.

The current turnaround of Bed Bath & Beyond reminds me a lot of the turnaround that Best Buy (NYSE:BBY) staged over the past few years. During that turnaround, BBY stock normally traded at  a forward price-earnings multiple of 13 times.

Let’s say that BBBY stock does the same. A 13-times forward earnings multiple on 2025 earnings per share of $5 results in a 2024 price target for BBBY of about $65. And that’s with an anemic 13-times forward multiple. A more “normal” 17-times forward multiple gets you to an $85 price target.

Either way, you see the bigger picture here. Bed Bath & Beyond has the fundamental earnings power to warrant a higher price tag on its stock.

The Bottom Line on BBBY Stock

The bull thesis on Bed, Bath & Beyond shares is about much more than meme stock momentum — it’s about the company’s promising turnaround.

Bed, Bath & Beyond’s core home-goods market is supported by non-cyclical growth drivers, while the brick-and-mortar component of that market has long-term staying power. The company is a leading physical player in that space, but its brand and business were mismanaged for years. Now they are being managed perfectly, and the company’s growth trends today look about as good as they have in five years.

As long as the retailer’s management team keeps executing flawlessly, Bed Bath & Beyond’s growth trends will continue to meaningfully improve, and BBBY stock will keep pushing higher — long after the meme stock momentum fades.

To that end, if you’re looking for a meme stock that’s more than a meme stock, then BBBY stock is for you.

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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this video.

By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s the theme of his premiere technology-focused service, Innovation Investor. To see Luke’s entire lineup of innovative next-generation technology stocksbecome a subscriber of Innovation Investor today.

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