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BBBY stock: should I buy the dip?

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Any UK investors who keep an eye on the US market may have noticed the rollercoaster ride of Bed, Bath and Beyond (LSE: BBBY) shares recently. What is this company and why has performance been so erratic? And should I actually consider buying BBBY stock today?

What’s going on here?

Bed, Bath and Beyond sells a range of merchandise in the home, baby, beauty and wellness markets. It’s one of the largest such businesses in the US.

Like many listed companies, BBBY stock performed well following the March 2020 plunge. Indeed, I would have made multiple times my money if I’d invested as we were sent indoors for the first time and held until late January the following year. At this point, it traded at over $50 a pop.

From here, however, the vast majority of these gains evaporated. At the end of July, BBBY stock changed hands for roughly $5. That’s not really surprising given its awful Q1 update the month before.

Even so, the more recent share price action has been compelling to watch. BBBY rocketed more than 300% in the first two weeks of August before crashing again last week. Some people made an absolute fortune by trading it.

So, is BBBY stock now a screaming buy?

The stock now trades at $11. As tempting as it might be to think that history will repeat itself, I’m not inclined to ‘buy the dip’ here for a couple of reasons.

First, the most recent explosive rise in the share price doesn’t appear to be due to anything that Bed, Bath and Beyond is doing as a business. Rather, it was probably due to a short squeeze.

Short squeezes happen when those who are betting that a company’s share price will fall will rush to close their positions. In this case, the catalyst appears to be a buying campaign orchestrated on the popular WallStreetBets (WSB) forum on Reddit. The name probably rings a bell. It was behind the enormous gains seen in meme stocks Gamestop and AMC during the pandemic.

Of course, a sudden jump in any company’s share price is often followed by a period of heavy selling as traders take profits. That’s arguably what we saw here last week, especially after billionaire investor Ryan Cohen sold his 10% stake.

Do I really want to expose myself to that kind of volatility? I don’t think so, at least with money I can’t afford to lose.

Second, I can’t help but think that the tough times will continue for Bed, Bath and Beyond. Is there anything I can get at this retailer that I can’t easily obtain elsewhere? Again, I’m not convinced. And it’s this lack of firm competitive edge — or ‘economic moat’ to quote Warren Buffett — that makes me wary.

Not Foolish

As an investor, I’m keen to pick up stock when it trades at a discount to what it’s truly worth. But I don’t just throw my cash at anything, especially when it’s become a plaything for traders. I’m looking for firms generating great margins and high returns on the money (my money) management put to work in the business. Why take a risk here when there are a lot of great British companies doing just this?

I’m reaching for my bargepole.

The post BBBY stock: should I buy the dip? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.