It has been a dizzying start to the year for Bed Bath & Beyond Inc. investors after the company’s bankruptcy warning sparked renewed buying by retail traders and fueled a rally reminiscent of the meme-stock frenzy two years ago.

Shares in the home-goods retailer soared 179 per cent this week, more than wiping out the share-price drop that followed the company’s warning on Jan. 5 that it may need to file for bankruptcy. While the rally cooled Friday, with the stock falling 30 per cent, Bed Bath & Beyond still notched a record weekly gain.

Nearly one billion shares changed hands this week, the most active five-day stretch of trading since August, when Bed Bath & Beyond volatility jumped amid a rebound in retail trader activity. Despite the weekly surge, its shares remain down more than 90 per cent from a peak in January 2021.

Bed Bath & Beyond’s bankruptcy warning last week set off a burst of retail buying, with the cohort purchasing nearly US$33 million of its shares since the markets closed on Jan. 4, Vanda Research data show. 

“Retail speculators are following the tactics first developed around the Hertz bankruptcy case in 2020 and later applied to Revlon shares in June ‘22,” a group led by Vanda senior vice president Marco Iachini wrote in a Jan. 12 note.

Investors have also been revisiting stocks that came under pressure in 2022 as the Federal Reserve persistently raised interest rates. A group of meme stocks tracked by Bloomberg has climbed 15 per cent in 2023 after sinking 45 per cent last year. GameStop Corp., AMC Entertainment Holdings Inc. and Carvana Co. ended the week with gains of more than 20 per cent each.

To be sure, the magnitude of purchases and the extent to which Bed Bath & Beyond enthusiasm has spread to other meme stocks has been limited so far, relative to other bursts in retail-trader activity, according to Vanda. In August, for example, retail speculators bought an all-time high of US$73.2 million of the stock in a single day.

“A broader increase in retail appetite could push flows into these names higher,” especially with the latest monthly inflation reading out of the way, and the next Federal Reserve meeting about two weeks away, they wrote. “But the hurdle to reach previous net-flow highs looks difficult, and any meme stock mania is poised to be short-lived.”

Bed Bath & Beyond’s surge is already pinching short sellers who recently took positions betting the company’s bankruptcy warning would come swiftly, meaning the group must weigh whether they will ride out their wager or buy back the stock to limit further losses. If the company goes bust, shorts will profit. The firm is speaking with potential lenders that would finance the company during bankruptcy proceedings, Bloomberg reported Thursday, citing people with knowledge of the matter.

But the longer the company sticks around and garners retail trading interest, the greater the possibility that a “massive short squeeze” will be triggered, according to Ihor Dusaniwsky, head of predictive analytics at S3 Partners.

Bed Bath & Beyond’s short interest is US$213.3 million, or nearly 41 million shares shorted, which is up from about 36 million shares shorted one month ago, data from S3 Partners show. Short sellers have already seen about US$112 million in paper losses this year through Thursday, according to S3 data. 

These losses, combined with high costs to borrow shares, make Bed Bath & Beyond “one of the most squeezable stocks in the market,” Dusaniwsky said.