Name That Trade $BBBY: Blood Bath & Beyond?

by Dan June 24, 2014 3:27 pm • Commentary

From its 2009 lows below $20, to the recent all time highs on the first trading day of 2014 above $80, BBBY dramatically outperformed the broad market, and most peers, gaining more than 300%:

BBBY 5 1/2 year chart from Bloomberg
BBBY 5 1/2 year chart from Bloomberg

Since the opening tick on Jan 2nd, BBBY shares are now down about 24% on the year after two consecutive earnings disappointments. The stock could be at a fairly interesting technical inflection point heading into tomorrow night’s fiscal Q1 earnings report.  The two year chart (below) shows the stock sitting on fairly important long term support, with no real support until $55 or about 10% lower than current levels:

BBBY 2yr chart from Bloomberg
BBBY 2yr chart from Bloomberg

The options market is implying about a 6% one day move which is essentially in line with the 4 qtr average.  Heading into the print, sentiment isn’t exactlly bullish with short interest ticking up to almost 5% of the float, analysts are fairly neutral to bearish with 10 Buys, 15 Holds, and 3 sell ratings, and options prices reaching the highs for the last 12 months.

There are a couple examples of late where beaten down once loved consumer stocks went significantly lower after what had already amounted to huge declines from the recent highs, namely WFM, LULU and COH.  Back in early May, when WFM was already down 27% from its 52 week highs, the stock declined almost 19% in the day following their disappointing fiscal q2 results.

And then there was LULU which saw a one day decline of nearly 16% after it reported their less than stellar fiscal Q1 results on June 12th, after the stock had already dropped 43% from the 52 week highs.

And just last week, with COH down 34% from its 52 week highs, the stock declined 10% in a straight line following their less than exciting investor day.

So you get the point, when the momentum breaks and the fundamental story changes there is no price investors are willing to play for broken cult stocks.

While BBBY looks like a tough press on the short side, recent history shows that trying to pick a bottom in these stories on the long side can also be a tricky business. Therefore defined risk options play are by far the best way to go regardless your inclination, as any bounce may be muted, and a decline could be painful.

This is NOT a trade we are doing now, but if you were of the mindset that BBBY is likely to follow the pattern of COH, LULU and WFM of late than you would look to get near the money exposure playing for a quick break lower.

Here is the trade that I would consider:

BBBY ($61) But July 60/55 Put Spread for 1.40

Risk 1.40 to break-even down 4% and make up to 3.60 if the stock is down 10% on July expiration.

What I don’t like about the trade is that if you get the direction wrong and the stock is even flat the vol crush after the event will make it very hard to break-even in the coming weeks.  You would need to have conviction that the company misses and/or guides down to put this trade on.  We will take a closer look before the print.