Bed, Bath & Beyond

Okay, it’s time for me to start thinking about the new Buy List for next year. As it stands now, my plan is unveil the 2006 Buy List sometime in the middle of December. Just to show you what a fair guy I am, I’ll let the entire world know what the stocks are two weeks ahead of time. I’ll start tracking it on January 1.
The Buy List will stay locked in place for the entire year. I won’t make any changes until next December.
Here at the world headquarters of Crossing Wall Street Dot Com, our research department is working round the clock to find you the best stocks on the Wall Street. Nothing is too good for my readers. I’ll let you know right now that the 2006 Buy List will look a lot like the 2005 list. Although I haven’t finalized the list, you can be sure that stocks like Dell (DELL), Expeditors (EXPD), Brown & Brown (BRO) and Fair Isaac (FIC) will most likely be there. Although I like Quality Systems (QSII), it may have to go. The stock is just getting too pricey (…sniff).
What are the new stocks? I still don’t know, but one stock that’s definitely catching my eye is Bed, Bath and Beyond (BBBY). I admit the name is horrible by the financials are amazing (52 straight quarters of meeting or beating estimates). In fact, I can’t think of a better argument than by offering you the following chart.
bbby.bmp
Notice how the earnings line (rolling EPS) keeps rising and the P/E ratio keeps falling. This situation is an excellent example of what I’ve talked about before. Good investing is NOT about seizing great opportunities. It’s the exact opposite. Good investing is all about not doing the negatives. Do not take risks you don’t need.
Looking at BBBY, we ask ourselves two questions. First, will BBBY’s earnings keep growing? The answer is, I don’t know. On January 1, everything could go horribly wrong. But what are the facts we do know? We do know that the stock has a long history of high returns-on-equity (usually around 25%). We do know that the stock has a long history of consistently growing its earnings. Will 12 straight record years lead to a 13th? I won’t say yes, but I will say that the risk is in our favor.
The second question is about the P/E ratio. Will it continue to fall? It certainly could. Even though the company’s earnings have soared over the last four years, that lower earnings multiple has held the stock back. A higher E hasn’t helped the P. Predicting expanding or contracting P/E multiples is a fool’s game. Future earnings you can kinda make a guess at (sorta). Not so for P/E ratios. Earnings can grow indefinitely, earnings multiples can’t. (Don’t tell anyone at Google.)
Once again, I can’t predict that BBBY’s P/E ratio will grow again. But I do know that it’s low. It’s about as low as it’s ever been. It could go lower. It absolutely could happen. That risk is there, but look at what we’ve done. We see it. We know it’s there and we’ve minimized it. That’s what good investing is all about.
For comparison, in the last year Quality Systems’ earnings have grown by roughly 50%. The P/E ratio has doubled. In other words, the stock has tripled. Once again, we’re not going to take risks we don’t need.
Stocks aren’t lottery tickets. It may seem that way each day, but stocks move for a reason. Those reasons may be quiet, but they’re persistent.

Posted by on November 27th, 2005 at 12:39 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.