The value of Bed Bath & Beyond (NASDAQ:BBBY) shares has tripled since Jan. 6. The threat of bankruptcy created a short squeeze in BBBY stock.
With short interest at nearly half its float, BBBY stock jumped 68% on Jan. 11 and another 20% overnight, opening today at $4.22 per share.
What Does This Meme?
InvestorPlace has been writing about Bed Bath & Beyond regularly as interim CEO Sue Gove tries to conserve cash and stave off bankruptcy. We asked if the company could die on Dec. 29 and again on Jan. 7.
Then the company issued its November quarter results. Sales were down 33% and there was a net loss of nearly $393 million, or $4.33 per share. Investors had been warned the numbers would find BBBY stock “teetering on a knife edge,” adding to the selling pressure.
But intense selling pressure from bad results are an invitation for speculators to borrow stock in hope of lower prices. Such “shorts” must be redeemed, so by buying the stock, other speculators can drive prices up and “squeeze” the shorts until they take a loss. A stock buyer’s potential loss is limited by the price of the stock, which can’t fall below zero. A short seller’s potential loss is theoretically unlimited.
The earnings release did not mention the word “bankruptcy,” leading retail investors who bought meme stocks in 2021 into a frenzy of buying. Most of the shorts were apparently held by institutions, adding to the small investors’ fervor.
What Happens Next for BBBY Stock?
While the updraft could help Gove pull off a sale of the company at a higher price, the results tell a different tale. When retailers don’t look good for their debts, suppliers stop shipping product, fearing they won’t be paid. This results in a death spiral, a self-fulfilling prophecy.
If you’re playing in this game, closing out winning positions before buying new ones can protect your gains. Be ready to sell at a moment’s notice.
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On the date of publication, Dana Blankenhorn held no positions in any companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.