Call Options Or Put Options On Bed Bath & Beyond (BBBY)?
Bed Bath & Beyond (BBBY) operates a chain of specialty retail stores in the US and Canada. BBBY has over 1,000 stores competing against companies like Williams-Sonoma (WSM) and Pier 1 Imports (PIR).
They sell a wide assortment of home furnishings, food, giftware, and health and beauty care items. Their objective is to be the customer’s first choice for products and services they offer.
The Company’s strategy is to provide excellent customer service, extensive breadth and depth of assortment, everyday low prices, and new merchandise.
BBBY currently trades for $73.92 per share. It’s at a 52-week high. And it’s up 50% from the 52-week low of $48.75.
Is this an opportunity to buy call options on BBBY as it races higher? Or is this the time to buy put options on BBBY as it pulls back from its highs?
The bulls make a convincing argument…
BBBY is a strong growth stock. They’ve grown revenue at nearly 10% per year over the last three years. And earnings per share grew at more than 35% per year over the same time.
Sales are expected to grow 8.6% this year. And earnings growth is expected to come in nearly 20% this year.
What’s more, BBBY just acquired Cost Plus (CPWM). The acquisition dramatically expands the number of food and consumable products BBBY offers.
And guess what?
BBBY’s acquisition is almost guaranteed to be successful. You see, over the last two years, BBBY has been testing Cost Plus stands inside of their stores.
Obviously, BBBY likes what they see from these Cost Plus stands inside their stores. Now they’ll be expanding this concept across more of the BBBY stores.
Quite simply, BBBY is a strong growth stock and the addition of Cost Plus will help fuel growth for years to come. This is one growth stock with plenty of room to run.
But the bears have a compelling case as well…
Strong growth and acquisitions aside, BBBY has come too far too fast. Simply put, BBBY is overvalued.
BBBY has a P/E of 18. That means investors are paying $18 for every $1 they earn. But it’s not just the valuation that concerns me… It is BBBY’s valuation compared to their competitors.
Right now you can buy competitors like Pier 1 Imports at a P/E of 12 or Williams-Sonoma at a P/E of 16. And get this… Pier 1 and Williams-Sonoma are actually growing faster than BBBY.
I can’t justify a higher price for BBBY when you can buy a faster growing competitor at a cheaper valuation. And we’ll likely see BBBY’s price fall in the weeks ahead as they fall back into line with their competition.
If you think the bulls are right, take a look at buying the BBBY August 2012 $77.50 Call for around $2.50.
If you think the bears are right, take a look at buying the BBBY August 2012 $67.50 Put for around $2.45.
Good Investing,
Corey Williams
Category: Call Or Put Options?
