I consider myself an optimist and I do not usually take a pessimistic view on stocks. In fact, I tend to avoid stocks that have bearish tendencies instead of shorting them or trading their put options. Nonetheless, I occasionally come across compelling evidence that makes going bearish a smart trading decision because I desire to profit from trading options.
I have discovered one such compelling reason in the stock of Bed, Bath & Beyond Inc. (NASDAQ:BBBY). Bed, Bath & Beyond Inc. with a market capitalization of $11.33B is a leading operator of specialty retail stores in the U.S. and Canada. The company offers merchandise through Bed Bath & Beyond, Harmon, Christmas Tree Shops (CTS), and That!, World Market, Cost Plus World Market, World Market Stores and Buy Buy BABY stores.
Decline in Recent Times
The stock chart above shows how shares of Bed, Bath & Beyond have traded down since the market opened this year. The stock is already down 25.51% in the last six months and I have reasons to believe that the decline will continue. The RSI of 27.26 also shows that the selling action is very strong on this company since bears are firmly in control of its market direction.
Disappointing Q1 Earnings
Bed, Bath & Beyond released Q1 2014 earnings yesterday and to say that investors were disappointed is an understatement. The company reported earnings of $0.93 per share on revenue of $2.66B compared to EPS of $0.93 per share on revenue of $2.61B in the same quarter last year.
However, the earnings of $0.93 per share pales in comparison to the consensus estimate of $0.95 and it is only a cent higher than the lower end of the company’s guidance of $0.92 to $0.96 per share. In addition, the revenues of $2.66B fall short of the consensus estimate of $2.69B. The Comps sales increased by 0.4% for the quarter; however, the comparable sales pales in comparison to the 3.4% growth that was reported in the same quarter last year and it falls short of the company’s guidance of 1% to 2.5% increase.
You will remember that the company reported dismal Q4 2013 results, which it blamed on harsh weather and thus, investors were hoping that the company would redeem itself by posting better results in the just-reported quarter.
However, the low first quarter and full year guidance given at the end of the last quarter seems to be right on point. It would be futile to expect any improvement in BBBY’s outlook in the current quarter (second quarter) or in the next (third) quarter. Hence, we can expect BBRY to continue its dance with the bears since the company’s line of business generally shows uptrend in the first and last quarters of the year.
How to Trade BBBY Options
The bearish sentiment on Bed, Bath & Beyond is firmly in place and I can see the stock going down south. The potential for an improvement in the share price will probably occur next year if the company is able to post better than expected fourth quarter results. I am getting into position with the BBBY Jan 2015 55.000 put (BBBY150117P00055000).
— Daily Option Alerts