Bed Bath & Belly-Up

 | Jul 03, 2014 | 9:00 AM EDT
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Someone alerted me to Bed Bath & Beyond (BBBY) the other day. I hadn't looked at it in a while. I pulled up the chart. It has to be one of the worst charts I have ever seen: gap after gap after gap lower, and support nowhere in sight. What's the story?

I read about 10 to 15 articles on Bed Bath & Beyond, and you know what? They were all bullish. Ehh, it's just a little margin compression. Ehh, Amazon (AMZN) is not a factor here. Ehh, it has an innovative distribution system. It was excuse after excuse after excuse.

I really have no axe to grind here, but I find the cognitive dissonance a little interesting. Seems that the stock has a cadre of dedicated bulls who are sort of unwilling to consider whether there are any larger issues here. Let me come up with some possibilities. Yes, Amazon might be a factor. Or maybe retail is finally starting to croak.

The Bed Bath & Beyond shopping experience isn't exactly pleasant. The stores are cluttered, the aisles are narrow, there is stuff stacked up to the ceiling and there are people pushing carts around, bumping into each other. I bought an $80 ice cream maker there about a year ago, and I was in a hurry to get out of there. Also, the store is middlebrow in a rich-and-poor retail world.

Bed Bath & Beyond manages to maintain pretty high margins because it doesn't have its own distribution centers. It has more than 8,000 suppliers, and it just ships stuff directly to the store. Actually, I don't really understand the bullish argument here. The stuff has to be shipped somewhere, and the cost has to be borne by somebody, and it gets passed along to the consumer eventually -- so whatever.

I think the larger issue here is that, after a five-year bull market, retail is not all that attractive right now. Expectations for retailers are very high, and even small disappointments can result in punishment for the stock. As I look around the retail world, I see stuff such as Dillard's (DDS), which has done a 10-bagger over five years. Come to think of it, do you know what Dillard's and Bed Bath & Beyond have in common? It's share buybacks.

That's another whole issue altogether. Yeah, it's hard being short a market when you have all these buybacks going on, and right now the credit markets are permissive enough that people just keep selling bonds and buying stock -- a strategy that will work until it doesn't. I've traded through a few cycles now, and when everyone is out there doing buybacks, a top is usually around the corner. It's rare for chief financial officers to buy back stock on the lows.

There's just a lot more interesting stuff out there. Copper is breaking out in spectacular fashion and Freeport-McMoRan (FCX), which I own, is putting in new highs -- coincident with inflation worries. I don't think a consumer-balance-sheet recession is necessary for us to see a big pullback in retail. It can just go out of favor.

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