Bed Bath & Beyond: Pay no attention to the share price
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Bed Bath & Beyond hasn't formally filed for bankruptcy, but the message from the bond market is clear: It's certain to do so. Once that happens, absent some miracle, the value of its shares will go to zero.
Why it matters: As often happens on the brink of bankruptcy, Bed Bath & Beyond's share price is being highly volatile. It dropped from a high of $2.74 last Tuesday to a low of $1.27, and has since rallied to close at $1.66 today.
Be smart: These moves are large in percentage terms, but ultimately meaningless as a guide to what the market thinks is going to happen to the company.
- When a heavily-indebted company like Bed Bath & Beyond approaches bankruptcy, the important market action moves to the bond market, rather than the stock market.
- The stock starts being traded as an out-of-the-money call option that's probably going to expire worthless. Such options, by their nature, tend to have highly volatile prices.
The big picture: Bed Bath & Beyond has a 5.165% bond maturing in 2044 that's now trading at just 5.5 cents on the dollar.
- That price alone says that if the company does end up staying in business, it's only going to be after wiping out all of the equity and a very large chunk of the debt.
