Wall Street ‘Cheats’. Here’s how...
Los Angeles based Wedbush Securities got some national press last Friday morning when Barrons.com republished their Jun. 26, 2014, research blurb on Bed, Bath & Beyond (BBBY). The analyst indicated he was now 'Neutral' on BBBY @ $61.11 per share. He cut his target price by $8 per share to $58.
The client research alert was accompanied by a BBBY chart dated June 26, 2014 @ 4:00 PM.
What was not said was that BBBY had reported after the close on the previous day. The stock was already trading in the $56 range as the analyst was writing to clients.
Barron’s on-line editor was complicit in publishing the Wedbush piece without fact-checking to see that it could not have been accurate at the time of its release.
How can I be sure that the Wedbush analyst knew about both the Q1 news and BBBY’s share price reaction? He discussed the quarterly report in his research alert (see excerpt below).
Pretending to have downgraded the stock before its $5 per share drop is not ethical. Counting his firm’s change in rating from a closing price that was no longer available inflates their model portfolio results in a way that customers know does not reflect reality.
Here is what took place in the shares of Bed, Bath & Beyond after the close on Wednesday but prior to Thursday’s opening. Note the impossibility of trading at $61.11 after 4 PM on June 25, 2014.
Past-posting is not a new concept. It was the main theme of The Sting, Hollywood’s Best Picture of 1973.
Now let’s look at the quality of advice Wedbush was offering, ignoring the fact that they failed to address events that had already taken place.
The analyst went to a Neutral, supposedly at $61.11 with a price target of $58. Is there anyone reading this that would like to hold a non-dividend paying stock that you believe will be about 5% lower in the foreseeable future? Just asking.
Was that $58 goal price really a good evaluation of where BBBY could be a year? The buzz on the Street was that BBBY had ‘missed’ its quarter. In fact, the 93-cents was right within management’s previous guidance range of $0.92 - $0.96. It exactly matched the year ago fiscal Q1 EPS in a period that spanned a (-2.9%) GDP and the much ballyhooed Polar Vortex.
I found that pretty impressive.
After digesting the ‘disappointing’ numbers here are the latest earnings estimates from up to 28 different analysts as reported on Yahoo Finance.
The consensus views for this year and next are both higher than ever before. That is true even if you go with the lowest numbers from any of the more than two dozen opinions.
What is the normal valuation for a company like BBBY? Check out how the stock actually traded over the past three years.
At the two best recent buying opportunities BBBY was selling for 12.8x and 11.9x the current FY’s earnings. Those who sold in despair, because they suddenly realized the company was facing competition from Amazon, missed chances at 46% and 47% gains that came within 12 to 18 months. Momentum-oriented traders paid 16.7x and 16.9x to buy the same shares they had shunned at much lower valuations.
At the June 26, 2014, intra-day low of $54.96 BBBY was available at 11.0x the newly lowered expectation for this year. An eventual rebound to a 16 multiple on the forward estimate would support a move back to about $80.
Is that crazy to imagine? Not if you realize that BBBY’s 2013 peak was $80.50 and this year’s pinnacle was $80.82.
Ignore last week’s absurd nadir and the following chart shows the classic cyclical pattern that had been in place since 2007.
Bed, Bath & Beyond has not been this cheap since its absolute bottom in the dark days of 2008. The previous four peaks came at valuations of P/Es of 16.6x and above. History suggests we will get a chance to sell at that level again.
This debt-free company offers much to like and little to fear from today’s quote. BBBY is now a contrarian’s dream.
Ignore the hype that ‘everybody’ is selling. Somebody smart is on the other side of all those panic sales. It’s not too late to join the party.
Disclosure: Long BBBY shares, short BBBY puts
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