BBBY Entering Shleifer Effect Watchlist

The share price of Bed Bath & Beyond (BBBY) fell over 15 percent today, and this looks like a classic Shleifer Effect Watchlist opportunity.

To net it out, expectations have been building (as we can see from the rising stock price above) for most of 2012. BBBY did pretty well during the economic downturn, and recovered faster than most people expected. In the meantime, they exceeded expectations for revenue and earnings growth, creating a halo effect for the company and its management. And creating even higher expectations.

And now those expectations have been crushed. Why did they miss? I'm not sure exactly, but I am sure that there's an overreaction in play when a company was valued near $18 billion yesterday and only $14.5 billion today despite net sales rising 5.5 percent, comparable store sales increasing three percent, and earnings actually going up 24 percent. But, alas, they missed consensus estimates and provided lower guidance for the next quarter than Mr. Market had hoped. So it tanked.

I've owned BBBY in the past. It's an interesting business - a category killer - though I've had a hard time understanding how they differentiate themselves enough to stop people from buying much of their core merchandise (linens) at Walmart or Target or online. Somehow they keep moving sales forward, due in no small part (I think) to a very permissive attitude toward promotions and returns. 

All that to say, the big drop has my attention, and I'm watching it. I don't count it among the companies that are so high quality (lots of growth, lots of barriers to entry, etc.) that I would buy them on any overreaction drop, but I'll watch to see if another bad news story leads to the kind of overreaction that's just too alluring to pass up.