Meme lord, Ryan Cohen dumped his shares of struggling retailer, Bed Bath & Beyond (BBBY), on August 16th and 17th.
The billionaire’s move caught many unsuspecting Reddit traders unawares, most of whom had followed Cohen to invest in the stock. Since the news of Cohen’s u-turn broke, BBBY has lost over 50% of its value in two days (as of the time of writing this article).
This has drawn the ire of many Apes who see Cohen’s sale as a stab in the back.
However, the bigger question on the minds of many investors is: “Did the billionaire lead the unsuspecting sheep to the slaughterhouse?”
In this article, we look at some lessons for retail investors to draw from Cohen’s move and the resulting price action of BBBY stock. But before we delve deep into that, a little background story is necessary to establish some context.
Background Story
A meme stock is born
Up until 2021, very few retail investors knew about BBBY stock. The struggling brick-and-mortar store had been left for dead by investors following a string of poor financial performances which has kept the company down.
This led to a piling of short bets against the stock as short sellers hoped to profit from the anticipated share price drop due to the company’s weak fundamentals and poor ratings from analysts.
However, the fortunes of left-for-dead stocks like BBBY changed when retail traders from r/wallstreetbets began targeting stocks with high short interest ratios.
The so-called Reddit revolution started as a short squeeze initiated by traders on Wallstreetbets a stock trading thread on Reddit. It soon snowballed into one of the most memorable fiascos in US stock market history.
Stocks like GameStop and AMC spiked as much as 100% in a single trading day as retail traders cheered on by commenters on Wallstreetbets bought shares in these dead stocks.
The spike in price forced short sellers to cover, which in turn sent the share prices higher. This short squeeze spilled over into other left-for-dead stocks like Bed Bath & Beyond, Nokia and Blackberry in later months
Coronation of the meme lord
Ryan Cohen was one of the first investors to recognize the power of retail traders along with Chamath Phapitiliya and Elon Musk.
One thing they have in common is projecting themselves as defenders of the ordinary investor. Wall Street has long scoffed at retail investors as unsophisticated and lacking the depth to understand the complexity of the stock market.
So it’s not surprising that many institutional investors were jolted when they began to lose money on stocks they heavily shorted against. But they still failed to acknowledge these outliers to the stock market.
Cohen is appointed Chairman
Ryan Cohen acquired a 10% stake in GameStop which he later increased to 13%. To his credit, these investments were made before the short squeeze of GameStop stock, in late January 2021. Around the same time, the investor was appointed as Chairman of the Board.
Upon taking over as chairman in early 2021, Cohen had already seen his initial investment in GameStop rise by more than 2,500%. With a bold and defiant speech, he opposed the board members’ idea to issue $100 million in equity due to concerns over the value of GameStop stock.
‘Papa Cohen’ as he is called by Gamestop shareholders proposed a series of changes to the company’s strategy, encouraging investments beyond brick-and-mortar stores, accelerating e-commerce penetration, expanding product categories (like creating NFTs), and aiming for a high-quality customer service model.
He also cut loose the company’s executives and replaced them with former Chewy and Amazon employees for senior managerial positions.
It did not take long for him to gain popularity among Apes who saw him as protecting their interests and being able to turn around the ailing company from a brick-and-mortar store, to an e-commerce giant.
So when the meme lord revealed an activist position in Bed Bath & Beyond, another company with abysmal fundamentals like GameStop, it did not take a rocket scientist to know that a meme stock was in the offing.
‘Activist investor’ steps in to save the day
Mr. Cohen’s fund, RC Ventures, first revealed that he owned a 9.8% stake in Bed Bath & Beyond in March, and called for several changes at the company, including a sale of the Buy Buy Baby brand.
In a letter, he criticized Bed Bath’s leaders especially then Chief Executive Mark Tritton, for racking up high pay while struggling to turn around the retailer’s performance. He called for a shakeup in its operations, including a closer look at spinning off or selling its baby store chain.
Bed Bath & Beyond reached a “constructive agreement” with RC Ventures. This included adding three of his nominees to the board of the home-goods chain. According to a statement from the company, its partnership with Cohen would enable it to explore potential changes to its financial structure. Cohen called the resolution “a positive outcome for all of Bed Bath’s shareholders.”
BBBY’s weak fundamentals continue to persist
However, despite Cohen’s intervention, BBBY has failed to stand on its feet. Similar to GameStop, the company’s losses continue to mount. Bed Bath & Beyond in June reported that its first-quarter net sales were down 25% year over year, resulting in a net loss of $358 million.
The company also reported a negative operating cash flow of about $400 million.
Of top concern is that its liquidity could be drying up, and the company must raise new capital to stay afloat. Bed Bath & Beyond reported roughly $108 million in cash and equivalents in its fiscal first quarter, down from $1.1 billion a year prior.
The company had been drawing on its existing $1 billion asset-based revolving credit facility from JPMorgan Chase, according to its latest quarterly filing with the Securities and Exchange Commission.
But as the assets that were used as collateral for that ABL facility lose value, Bed Bath & Beyond will face greater pressure from its lenders to cut costs and find money elsewhere.
Revival of the dead stock
After being on a nose dive for much of the year, BBBY began to reverse upwards in August. This was sometimes with moves greater than 20% in a single trading session.
BBBY’s August rally started after an amended regulatory filing from Cohen’s venture capital firm RC Ventures showed that he owned distant out-of-the-money call options, in addition to his nearly 12% stake in the company (as of April 21).
His options position served as bets that the stock will rise significantly before January, allowing Cohen to then buy shares at a discount.
The filing sent retail traders into a frenzy who flooded Reddit’s WallStreetBets board with memes urging Mr. Cohen on. The stock price rose as high as 300% for August as retail investors piled into the stock. As much as 395 million shares traded hands on a single day.
Compare that to the average daily trading volume of 20 million in July.
Cohen pulls the rug out
All went well until Cohen filed to sell his stake in the embattled retailer less than six months after he took a position in the stock. Cohen’s move sent accusations flying. One institutional investor suggested that Cohen used retail investors to pump the stock for his benefit.
“Somebody bought it at $30, and someone lost 12 bucks a share to enrich Ryan Cohen,” said Michael Pachter, an equity research analyst who covers GameStop for Wedbush Securities.
According to recent SEC filings, Cohen had exposure to 9.45 million shares of Bed Bath & Beyond stock as of Tuesday.
His position consisted of:
- 7.78 million common shares
- 1,257 $60 strike call options
- 444 $75 strike calls
- 5,000 calls at the $80 strike
It’s not clear if any shares or options contracts have been sold since Cohen filed the intent to sell.
Just a day before he filed an intent to sell his entire BBY stake, Cohen filed his amended ownership 13-D showing that his stake in Bed Bath & Beyond was unchanged.
The timing raised eyebrows
The timing of Cohen’s two filings is what is raising eyebrows, with some investors suggesting that this was done to create more hype around the name in the retail community.
It is unclear why Mr. Cohen filed those updated forms days after because Bed Bath & Beyond first disclosed it had acquired more shares in April. Also, such forms are required to be filed within days of an investor becoming an insider.
Either way, Cohen appears to have earned nearly $57 million on his Bed Bath & Beyond investment. This has led many to believe that Cohen ‘knowingly’ led retail traders on, and left them holding the bag.
4 Lessons for Retail Investors to Learn from Cohen’s BBBY Dump
While we in no way suggest that Cohen misled retail investors, several lessons could be drawn from Cohen’s move.
1. Fundamentals matter.
Once again, retail traders have been given a classic lesson in why fundamentals matter when picking stocks.
The company’s mounting losses and weak balance sheets did not make it an obvious choice for stocks you would want to pick and hold. Also, the current macroeconomic environment which is bedeviled with high inflation. Aggressive rate hikes do not support speculation and extreme liquidity in a stock.
Those who failed to heed the warning sign were left holding the bag.
2. Don’t follow the big wigs.
An emerging trend in the past two years among the retail crowd is investing in stocks pushed by high-net-worth individuals.
Unsuspecting investors believe that these billionaires have more knowledge than them. Presuming they’re protecting their interests, they take their advice without conducting the necessary due diligence.
In recent times, experience has shown that the actions, not words of these people should be watched.
- Elon Musk on SNL said his dogecoin was a hustle.
- Chamath Palihapitiya has dumped holdings in his SPCE which he promoted to retail investors through social media.
- Scott Minerd walked back on his earlier comments that bitcoin would go to $100k.
This shows that the ‘whales’ are not to be trusted.
3. Speculation most often leads to tears.
Frenzied retail speculation may have worked in 2020 and 2021, due to the easy monetary policy of the Federal Reserve. This saw more money pumped into the economy.
However, that cannot hold in an economy that may be entering a recession. Speculation is akin to gambling. When there is no merit to investing in a stock other than a bet that it would rise, then why invest in it at all?
4. Be pragmatic in risk-taking.
While much attention has been drawn to Cohen’s U-turn from BBBY, his move is an example of how to manage risk.
Cohen knew the company had weak fundamentals (which he tried to turn around). He also knew that the rally would not last long, which would have cost him money in the long term.
So Cohen did what every retail investor should have done: leave when the ovation is loudest. BBBY stock rose to a 600% high before retracing. Prior to Cohen’s dump sale of the stock, the stock was still over 200% in August.
The price volatility and huge gains were a cue for retail investors to take in profits before the bottom breaks.