Were Hedge Funds Were Right About BBBY: Shares Sinking On Earnings Miss, Down 11% In Q2

Bed Bath & Beyond Inc. (NASDAQ:BBBY) reported its financial results for the first quarter of Fiscal Year 2015 on Wednesday, for the period ended May 30, and the results proved disappointing to Wall Street, missing its expectations on the bottom line. Bed Bath & Beyond Inc. (NASDAQ:BBBY)’s stock price drooped by 0.9% soon after its earnings report on Wednesday and fell another 1.61% in after-hours trading. The company reported fiscal first quarter net earnings of  $0.93 cents per diluted share or $158.5 million compared to earnings of $0.93 cents per diluted share or $187.1 million during the same period a year ago. The FactSet consensus estimate was that the home products and decor producer would post $0.94 earnings per share. Bed Bath & Beyond Inc. (NASDAQ:BBBY) also reported a net sales increase of 3.1% to $2.74 billion, which equaled estimates. However, same-store sales, though they increased by 2.2% year-over-year, also fell short of the FactSet consensus of a 2.5% year-over-year growth. Bed Bath & Beyond Inc. (NASDAQ:BBBY) remained almost flat in the first three months of the year, but the stock has dropped by 11% in the second quarter now, after we witnessed a noticeable decrease in hedge fund support for the stock during the first quarter. Did hedge funds see this coming? Let’s look at the data.

kevin brine / Shutterstock.com

kevin brine / Shutterstock.com

Why do we track insider and hedge fund activity on a stock? Its because hedge fund activity can give us some valuable insight into it. Tracking hedge fund activity on a stock can help us read the minds of some of the most experienced money managers in the world, who know the financial world inside and out. On the other hand, insider activity on a stock is equally important to track, because insiders always possess that teeny bit of extra information about a stock, well before portfolio managers and analysts.

Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions actually performed better than the market. Small-cap stocks, activist targets, and spin-offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 84 percentage points since the end of August 2012 and has returned 142% (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

For Bed Bath & Beyond Inc. (NASDAQ:BBBY), the number of hedge funds with positions in the stock dropped by 21% in the first quarter. There were only 33 hedge funds holding the stock at the end of the first quarter, which stood at 42 at the end of fourth quarter. In addition, the aggregate capital invested in the stock by these hedge funds plunged by 21% to $672.1 million by the end of the first quarter, despite the stock remaining relatively flat as previously mentioned. The data indicates hedge funds were extremely bearish on the stock in the first quarter, and they certainly to be right.

Let’s take a look at the insider action on the stock. There were no insider purchases of the shares since the beginning of this year, but there were quite a few insider sales in the last few months. CEO of Bed Bath & Beyond Inc. (NASDAQ:BBBY), Steven Temares offloaded around 200,000 shares of the company in the first quarter. Co-Chairman Warren Eisenberg sold around 200,000 shares in the first quarter and 3,000 shares in May. Another Co-Chairman, Leonard Feinstein sold around 324,500 shares in the first quarter and 165,000 shares in April. There were a few other insider sales as well.

Let’s move on to a detailed look at the hedge fund activity now.