An Australian shares fund doubled its investment in just a few days, thanks to collateral damage from the GameStop Corp (NYSE: GME) saga.
Forager Funds international shares fund portfolio manager Gareth Brown and analyst Chloe Stokes gave an update to clients this week that would have made them all smile.
No, the fund didn't own GameStop shares before they rocketed up.
Their story was how the short squeeze super-charged a more conventional stock pick that they made.
It was all about the journey of US retailer Bed Bath & Beyond Inc (NASDAQ: BBBY).
This company was heavily shorted, just like GameStop.
"One of the stocks highest on our to-do list was also one of the market's shorted stocks, with more than 60% of its outstanding shares sold short," said Stokes.
This was because the homewares chain had been in deep strife in recent times.
According to Stokes, Bed, Bath & Beyond had an overpaid management team that had neglected to get on the e-commerce wagon and the industry trend towards own-brand products.
"Add the expected cash burn from COVID-impacted sales, and many bears expected the company to go bankrupt."
Why was Forager interested in a dud stock?
Stokes told clients that 2 years ago a group of activist investors dragged the company into the 21st century.
"Since then we've had a complete board and management team overhaul," she said.
"And many of the new hires had experience with business transformation and operating omni-channel businesses."
Bed, Bath & Beyond's online presence ramped up, non-core businesses and assets were sold off and debts repaid.
"In the most recent quarter, 31% of the company's sales were online, and it should be even higher than that in the next quarter."
Stokes and Brown's team felt that the bear case had now eroded considerably. With the share price still pretty low, they judged that it now had "almost 100% upside".
How GameStop triggered a Bed Bath & Beyond windfall
But as they were thinking about the case, the GameStop saga exploded.
This was because the hedge fund that was devastated by the GameStop short squeeze, Melvin Capital, also had a huge short position on Bed Bath & Beyond.
Melvin would likely have to liquidate some holdings to survive. If Forager was to buy in, they didn't have much time.
"We had to work really really quickly. There was massive short interest in a market where everyone was suddenly taking notice of that," said Brown.
"We need to hurry up because [Melvin] might need to close out their position in a hurry, which means they have to buy stock. The stock skyrockets, we miss our opportunity."
Stokes said Forager managed to buy Bed, Bath & Beyond shares about "10 days ago". This would have been around 20 January when it was priced around US$25.
A few days later, the GameStop short squeeze hit the fan.
As Melvin Capital was sent broke, just as Forager predicted, it had to buy Bed, Bath & Beyond shares to cover its short positions.
"The stock has doubled," said Stokes.
"So it's hit our base case estimate in just 10 days."
At the height of the GameStop mania last week, Bed, Bath & Beyond shares hit US$53.90.
The higher the price went, the riskier it became to hold onto the shares – so Stokes' team quickly sold off to lock in the profits.
Brown admitted this isn't the usual way to make money.
"It's really hard to grumble about doubling your money in a couple of days," he said.
"[But] we feel more comfortable when an investment thesis takes a year or two to play out."
The share market is currently in "a very, very unusual" state and many of Forager's recent purchases have "worked out blisteringly quickly".
"Others that we've been looking at and hoping to buy have skyrocketed before we've had the chance."
