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Troubled homewares retailer Bed Bath & Beyond may be heading for a ‘meme squeeze’, says analyst Ihor Dusaniwsky of S3 Partners.

Bed Bath & Beyond Inc. BBBY,
+48.71%
announced the closure of nearly 130 stores on Tuesday as it tries to sort out its financial woes. The company announced the closures, along with third-quarter results that fell short of analyst estimates, just days after it said it may need to file for bankruptcy.

Despite the company’s woes, shares of Bed Bath & Beyond ended Tuesday’s session up 19.4% and had its biggest percentage gain ever on Wednesday. The stock surged 12.5% ​​on Thursday, outperforming the S&P 500’s SPX,
+0.09%
gain of 0.02%.

Related: Other businesses will feel the brunt of Bed Bath & Beyond store closures, says bankruptcy expert

“We haven’t seen one [Bed Bath & Beyond] short squeeze in 2023 ahead of today’s 50%+ price movement, but if the stock continues to rise, we could see some short term short sellers exit their positions and start pocketing (realizing) the profits they made in 2022 ,” wrote Dusaniwsky, managing director of predictive analytics at S3 Partners, in a note released Wednesday. “Of course, the crucial difference between [Bed Bath & Beyond] and other crowded shorts is that there is a definite threat of bankruptcy, which could encourage the shorts to hold their positions, incur some temporary losses, and wait for that rally in anticipation to a $0.00 share price in the event of bankruptcy.

In the note, Dusaniwsky said Bed Bath & Beyond’s short interest is $82.7 million, or 39.93 million shares short, representing a float of 52.07% short. Bed Bath & Beyond has the second-highest percentage of uncovered interest for stocks with more than $10 million in uncovered interest in the US, second only to Silvergate Capital Corp. YES,
+14.61%,
according to research by S3 Partners.

The shorts are active at Bed Bath & Beyond, with 25.1 million new short sales since hitting the 2022 Year-Start high of $27.23 on March 29, according to S3 Partners. This is a 169% increase in total shares sold, as the company’s stock price dropped 91%. In the last 30 days, S3 Partners recorded 3.8 million new short sales, a 10.4% increase in total short shares as the share price declined 33%.

Read too: As the specter of bankruptcy looms over Bed Bath & Beyond, what’s next for the troubled retailer?

“[Bed Bath & Beyond] it has become less institutional and more retail on the long side, with massive institutional activity on the short side,” wrote Dusaniwsky, noting that the vast majority of short sales are done by institutions. “This mix creates a volatile stock as fundamentals are not the main driver of price movement – ​​the stock is becoming much more of a momentum and a technical name – wild and sudden price fluctuations will not be out of the ordinary.”

Analysts see the ghost of Chapter 11 looming over the retailer. Last week’s announcement that the meme stock darling may need to file for bankruptcy sent shares of Bed Bath & Beyond plunging to a 30-year low and followed a turbulent few years marked by strategic mistakes, cash burns, business trends challenging underlying issues and the impact of the COVID-19 pandemic.

Now read: Bed Bath & Beyond’s bankruptcy notice marks the latest chapter in the troubled retailer’s downward spiral

If the threat of bankruptcy becomes more certain, a Bed Bath & Beyond short squeeze becomes less and less likely, with minimal short coverage, as short sellers expect a $0.00 share price, from according to Dusaniwsky. But if bankruptcy isn’t in the future, the company’s soaring stock price will force a huge short squeeze and short sellers will rush for the doors and buy to cover in order to retain some of the mark-to-market profits they made in 2022, he added.

Dusaniwsky characterized the situation faced by Bed Bath & Beyond shares as “very binary” in a phone interview with MarketWatch. “Or do you have a meme squeeze where retail investors push the stock up, [and] tightening will force short buy hedges to push equities higher,” he said. “Either the stock goes bankrupt or there is a low-priced takeover offer.”

Of the nine analysts surveyed by FactSet, three have a maintenance rating and six have an underweight or sell rating for Bed Bath & Beyond.

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