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Investors have spent nearly $200 million trading theoretically worthless shares in Bed Bath & Beyond since the home-appliance retailer went bankrupt in early May, in the latest manifestation of the stock meme craze.
Bed Bath & Beyond is one of a handful of unwelcome consumer brands that have become popular with retail investors during the coronavirus pandemic, with small investors setting out on social media to push the share price well above what most professionals would consider rational.
Many companies have used the enthusiasm as an opportunity to shore up their ailing businesses by issuing new stock, but Bed Bath & Beyond finally filed for Chapter 11 bankruptcy protection earlier this year and was delisted.
Nevertheless, an average of 18 million company shares have changed hands daily in the over-the-counter market since then, according to Bloomberg data. Users of the Reddit website have shared highly speculative theories about the possible change plans for the retailer.
Trading activity comes in an unexpectedly strong year for US stocks, with the Nasdaq Composite posting its strongest first half in 40 years despite a sharp rise in interest rates, sparking fears that the market is foaming and valuations are too high.
“This is an extension, almost a mutation, of the stock meme phenomenon,” said Anthony Chukumba, an analyst at Loop Capital Markets who previously covered Bed, Bath and Beyond.
“We can have a real debate about the value of Tesla, or GameStop for that matter, because it’s still a decent company,” he said, referring to another stock favored by retail investors. “We can’t debate the value of Bed Bath & Beyond because we know what it’s worth.”
In its initial bankruptcy filing in May, Bed Bath & Beyond reported $5.2 billion in debt, compared to just $4.4 billion in total assets. Shareholders will be last in line to receive any payment from selling their business.
More than 12,000 stocks trade on the major US over-the-counter exchanges, which are operated by the OTC Markets Group. The exchange is divided into three markets, with the riskiest and lightest stock trading regulated on the “Pink Open Market” – so called because of the pink sheets on which quotes used to be issued.
When a company declares bankruptcy, it is taken off the main exchange and its shares are traded on the pink notes for a fraction of their original value. “These stocks will be lurking until the bankruptcy estate is resolved, which could take months or years,” said Steve Sosnick, chief strategist at Interactive Brokers.
Whether stockholders receive anything at the end of the bankruptcy process depends on whether bondholders, who are paid before equityholders, are able to get their money back.
However, Bed Bath & Beyond bonds were trading at less than 2 cents on the dollar. “The bond market is telling you the stock is worthless,” Sosnick added.
Until last week the company didn’t even have the Bed, Bath and Beyond name anymore. Online retailer Overstock.com bought its intellectual property for $22 million and has announced plans to relaunch the brand, pushing its own shares up more than 60 percent.
But that hasn’t stopped enthusiasts from pushing the share price of original Bed Bath & Beyond up nearly 300 percent since it was scrapped. The average daily trading value over the past month is $4.8 million.
This isn’t the only business that has gone bankrupt recently to pique interest. Investors have also traded hundreds of millions of dollars worth of stock in bankrupt lenders First Republic, Silicon Valley Bank, and Signature Bank, though none have matched the popularity of Bed Bath & Beyond.
On the Reddit board, there is occasional mention of Hertz, whose stock plummeted when it filed for bankruptcy protection in 2020, but then skyrocketed during the retail trading frenzy, allowing it to fundraise and restructure.
The original meme stock spike in January 2021 was rooted in anti-establishment anxiety, with retail traders looking to shake hedge fund bets against fan-favorite stocks. The sudden increase in demand led to a “brief squeeze” that accelerated a share price rally as hedge funds scrambled to cover their positions, with Melvin Capital the highest profile casualty. Now, however, retail punters are betting against each other.
“No institution has shortened a Bed Bath for 25 cents,” says Chukumba, at Loop Capital. “No ‘man’ can keep it up anymore.”
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