This Indicator Could Have Saved Traders From a Rich Guy's Bet

Editor's note: The meme-stock mania has claimed more victims. Today, we're sharing an essay from Marc Gerstein, director of research at our corporate affiliate Chaikin Analytics. He shares the one indicator – and a core truth about the markets – that could have saved retail traders from this critical mistake...

Ryan Cohen's claim to fame is Chewy (CHWY)...

Cohen co-founded the pet-supply website roughly a decade ago. He cashed out in 2017, when PetSmart and a private-equity firm bought the business for $3.35 billion.

Since then, Cohen has stayed busy doing typical "rich guy" stuff. That includes running RC Ventures...

Now, RC Ventures is self-described as a "seed and venture capital firm that invests in early stage companies in high growth emerging markets." But that hasn't stopped the firm from making speculative bets in the market.

One in particular recently garnered a huge amount of media attention...

I'm talking about another "meme stock" debacle. Traders who got caught up in Cohen's moves forgot an important truth about the markets – and ended up lining a rich guy's pockets instead...

You see, RC Ventures poured roughly $121 million into Bed Bath & Beyond (BBBY) shares and options earlier this year. Then, Cohen went on to make a public fuss about it.

Not surprisingly, that got the band of social media traders known as the "Reddit crowd" interested. If you've followed the so-called meme-stock mania, you know these traders love beaten-up and hated companies. And many of them assumed that Cohen knew something they didn't.

Ultimately, Cohen and RC Ventures made roughly $68 million in less than a year...

How? Well, retail traders pumped up Bed Bath & Beyond's share price for Cohen... And then, they provided liquidity when he exited the entire position two weeks ago.

In other words, Cohen's moves crushed many retail traders.

It's a lesson in prizing a rich investor's charisma over business fundamentals. The thing is, the Chaikin Analytics Power Gauge knew better. Traders could have easily avoided this mess with even the briefest of glances at our system's assessment of Bed Bath & Beyond.

This reading is as straightforward as it gets. Take a look...

Bed Bath & Beyond has maintained a "bearish" or worse overall rating from the Power Gauge for most of the past year. It underperformed the S&P 500 Index for most of the year. And according to our Chaikin Money Flow indicator, it saw nearly no "smart money" activity.

Now, we don't need to know Cohen's true motive to understand this chart...

Bed Bath & Beyond is in a dire situation. And that was true when Cohen bought in earlier this year as well.

Even if you had expected a "turnaround story" to play out, waiting for any signs of life from the business would have been the right move before buying.

That's even clearer from Bed Bath & Beyond's revenue growth over the past five years – or, I guess I should say, its lack of revenue growth...

The business is shrinking. Its revenue is down roughly 36% since 2017.

And it gets worse... The company currently produces a roughly negative 27% return on investment. That means it loses nearly 30 cents for every dollar it invests.

This isn't a startup. We're talking about an established retailer.

I get it... Underdog stories are great. And it feels amazing to spot a company with the opportunity for a huge comeback.

But the Power Gauge saw this debacle from a mile away. And the Reddit crowd should have seen it coming, too.

It doesn't pay to invest in a business that can't perform. Traders have forgotten that hype isn't enough. The financials matter.

With just a quick glance at the Power Gauge, these retail traders could have avoided disaster. But instead, they dumped tens of millions more into a rich guy's pockets.

Cohen cashed out... And the retail traders are now stuck holding shares of a dying company.

But that hasn't stopped meme-stock traders from taking another shot. Bed Bath & Beyond plans to unveil its turnaround plan today. And traders have pushed its share price up roughly 40% from its lows a week ago in anticipation.

That kind of volatility might attract gamblers. But I'll stick with the Power Gauge.

Good investing,

Marc Gerstein

Editor's note: Our friend Marc Chaikin, founder of Chaikin Analytics, often says his systems are able to pick up the "tremors" you feel before a full-blown earthquake. And right now, he believes most people aren't ready for what's ahead...

We've already seen new declines in several parts of the market. If you're wondering where to move your money – and what comes next – he's sharing the details now... including one stock he says you should buy today, and one dangerous stock to avoid. Get the details here while you can.

Further Reading

Meme-stock traders aren't the only ones who get it wrong. Wall Street analysts can too... And if you're not careful, their "buy" ratings can lead you astray. Read more here: This Is What Happens When Analysts Become Ostriches.

"Unfortunately, grand visions backfire all too often," Marc Gerstein writes. One company is falling short of its expensive aspirations today. That's a problem for investors who can't see past the hype... Learn more here: This Company's Dreams Don't Live Up to Reality.