Morning Update

On January 24th Oppenheimer upgraded shares of Bed Bath and Beyond to Outperform with a price target of $71. The stock took off and traded to a high of 59.95 on Friday before giving back 2.1% yesterday. But one option trader was taking advantage of the profit taking pull back in the stock to buy calls. The biggest trade of the day was the purchase of 8126 March 62.5 calls for $0.41 with the stock at 58.00. This is a bullish trade that will profit if BBBY is above 62.91 (8.5% higher) at March expiration.

Despite the S&P 500 trading at multi-year highs shares of BBBY are still well below their 2012 peak. The stock has struggled in the fourth quarter due to decelerating sales growth that the company blames on declining sales of Green Mountain products as they become increasingly available elsewhere and competing products take market share. Bed Bath and Beyond shares have also suffered due to the impact on EPS from acquisitions of Linen Holdings LLC and Cost Plus. However, these should be temporary and BBBY has a strong track record of maximizing synergies from acquisitions very quickly.

BBBY has proven they can deliver year over year revenue and earnings growth along with free cash flow, all while maintaining zero debt. The retail sector has been strong for the past couple months meaning that BBBY has room to play catch up. At current levels some of the top performing retail names are getting pricy but BBBY trades at a 13.4 P/E, generates $5.21 in cash per share and has gross margins of 41%. Buying upside calls into weakness is a good contrarian play that could show a big return with little risk if Oppenheimer’s analysis is correct.