TIP253: An Intrinsic Value Assessment w/ Jesse Felder (Business Podcast)

Episode Summary

Executive Summary: The episode features Jesse Felder making a contrarian deep-value case for Bed Bath & Beyond, arguing the stock’s collapse reflects excessive fear rather than fundamentals. He combines valuation, technical momentum, insider behavior, and short-interest analysis to justify a bullish stance, while also discussing retail competition, buybacks, dividends, and intrinsic value. The discussion emphasizes margin of safety and the dangers of relying on peak earnings or simplistic valuation metrics.

Main Topics: Contrarian Bull Case for Bed Bath & Beyond (Priority: 5/5): Felder argues BBBY is one of the cheapest stocks he has seen in years and that the market has overreacted to uncertainty, leadership transition, and retail disruption. Valuation Framework and Intrinsic Value (Priority: 5/5): He explains why he prefers price-to-sales, price-to-free-cash-flow, and tangible book value over P/E, and estimates fair value around $30 per share. Technical Momentum and Bottoming Signals (Priority: 4/5): Felder uses moving averages, MACD, RSI, and money flow to judge whether downside momentum is fading, looking for non-confirmation at new lows. Insider Activity and Buybacks (Priority: 4/5): He views option exercises and lack of executive selling, combined with a large buyback authorization, as evidence of a potential floor under the stock. Short Interest and Short Squeeze Potential (Priority: 5/5): With a very high short float, Felder sees BBBY as crowded on the short side, making it vulnerable to a squeeze if results improve even modestly. Retail Competition and Strategic Challenges (Priority: 4/5): The conversation covers Amazon, Wayfair, coupons, margins, and whether Bed Bath & Beyond can compete in a commoditized category while preserving profitability. Capital Allocation and Management Turnaround (Priority: 4/5): They discuss dividends, debt, repurchases, board refreshment, and whether the company should prioritize buybacks over dividends or even consider a private takeout.

Key Arguments: BBBY is deeply undervalued relative to its peers and historical trading ranges; Felder argues it could be worth roughly three times the current price. The market’s fear around retail disruption and leadership change has created a dislocation that value investors can exploit. P/E is unreliable when margins and leverage are at extremes, so sales, free cash flow, and tangible book value provide a better basis for valuation. Momentum indicators showing higher lows while price makes new lows suggest downside pressure may be waning. High short interest can amplify upside if the business merely stops deteriorating, because shorts eventually need to cover. Insider option exercises without selling are interpreted as bullish because management appears unwilling to reduce exposure at current prices. The company’s buyback authorization is large enough relative to market cap that, in theory, it could materially support the share price. Despite competition from Amazon and Wayfair, BBBY has still generated meaningful free cash flow, implying it can survive in a commoditized sector. Coupons are not simply a margin drag; they are part of BBBY’s customer behavior and may be necessary to preserve traffic and perceived value. The online strategy is helping offset store declines, though it is still early and the ROI of past investments is debatable. Management’s capital allocation should favor buybacks over dividends because repurchasing stock at depressed valuations offers a much higher expected return. Felder believes activists entering the stock is a positive sign because they typically push for value-unlocking operational and governance changes.

Data Points: Bed Bath & Beyond market cap (current in discussion): about $1.2 billion - Used to highlight how far the company has fallen from a former large-cap status. Prior market cap: $17 billion - Referenced as the company’s value not too long ago before the decline. Stock price when first discussed on the show: $35 - The stock was at this level in Q2 2017 when Stick pitched it. Stock price during episode: around $10 - Current price at the time of the conversation. Short float: 46% - Highlighted as unusually high and a potential catalyst for a squeeze. Peer-based fair value: $60/share - Estimated if BBBY traded in line with peer valuation multiples. Valuation vs. cheapest peer (Kohl’s): $30/share - If BBBY traded at Kohl’s valuation, Felder said it would be worth about this much. Estimated fair value range: $29-$30/share - Combined peer comparison, historical valuation, and DCF outputs. Historical valuation-based fair value: $33/share - If BBBY traded at its lowest valuation in the last five years. Free cash flow over last 12 months: over $4/share - Used to show the company can still generate cash despite competition. Revenue trend since 2016: flat - Top line described as roughly unchanged while margins declined. Gross margin decline: from 41% to 34% - Illustrates long-term margin compression in the business. Online same-store sales/comps decline: negative 6.6% in last quarter - Online growth was partially offsetting store declines. Cash on hand: about $900 million - Part of the capital structure analysis. Debt: about $1.4 billion - Used to calculate net debt and enterprise value. Net debt: about $500 million - Derived from cash minus debt. Enterprise value: about $1.7 billion - Felder’s estimate based on cash, debt, and market cap. EBITDA: about $700 million - He noted this could cover net debt in roughly one year. Debt maturities: 2034 and 2044 - Mentioned as part of the company’s manageable debt profile. Debt coupon: 4%-5% - Used to argue debt is inexpensive and could support more leverage if needed. Dividend yield: 6.5% - He said he would prefer eliminating the dividend in favor of buybacks. Current earnings yield at $10 and 5x earnings: 20% - Used to compare buybacks to dividend payout economics. Expected earnings per share: $2/share this year - Referenced when discussing a 5x earnings valuation. Buyback authorization: about $1.2 billion - Comparable to market cap, potentially enough to take the company private in theory. Perceived return scenario in DCF: 15% discount rate with -5% annual FCF per-share decline - He said even this harsh assumption still implies attractive returns at the current price. Alternative DCF scenario: 10% discount rate with -15% FCF decline - Used to show how much bad news appears to be priced in.

Pivotal Quotes: "the price you pay determines the rate of return" — Jesse Felder: Explaining why he rejected the earlier stock pitch when BBBY was much higher. "This stock is one of the cheapest stocks that I've seen in years right now at its current price valuation." — Jesse Felder: Summarizing the core of his bullish thesis on BBBY. "I've never had a really successful investment that I wasn't scared to buy." — Jesse Felder: Describing why discomfort and fear often accompany the best opportunities.

Implications: For listeners, the episode shows how to assess a hated stock using multiple lenses: valuation, technicals, insider behavior, and capital structure. It also suggests retailers can still create value in a tough market if cash flow, buybacks, and execution offset disruption.