Bed Bath & Beyond stock tanks; Bed Bath & Beyond the Pale; When Private Equity Takes Over a Nursing Home; Inside the Massive Effort to Change the Way Kids Are Taught to Read

1) Bed Bath & Beyond (BBBY) is crashing again today, as I predicted, in the wake of an SEC filing and press release that disclosed the following: Bed Bath & Beyond stock tanks after cutting staff, closing stores, and floating share sale. Excerpt:

Bed Bath & Beyond stock is getting smoked early Wednesday as investors get more clarity on the mess facing the struggling retailer.

On Wednesday morning, in an SEC filing and a press release ahead of an investor presentation, the company outlined plans to issue more stock, close 150 stores, and fire 20% of its staff as the retailer looks to stem the bleeding from a collapse in sales.

My take: Today's news further reinforced my belief that Bed Bath & Beyond will have to file for bankruptcy within months and the stock will become worthless, so if you made the mistake of buying it, it's not too late to sell.

2) This post by the Doomberg blog perfectly echoes my view of Ryan Cohen's pump and dump of BBBY's stock: Bed Bath & Beyond the Pale. Excerpt:

Recently, Ryan Cohen – a billionaire entrepreneur and highly successful investor – executed what appears to be a quintessential gamma squeeze in Bed Bath & Beyond (BBBY), one of the original meme stonks from the 2021 Reddit mania. Brazenly, Cohen went for the "hide in plain sight" approach, properly detailing his every move in filings with the SEC. The fact set in this incident is staggering, and what – if anything – the SEC will do about it will undoubtedly set precedents...

On Monday, August 15, Cohen notified the investing public that his firm had purchased a significant number of deeply out-of-the-money call options in BBBY back in late April:

"Shares of Bed Bath & Beyond are surging higher by more than 60% on an apparent short squeeze. This is great news for Ryan Cohen's RC Ventures, as a regulatory filing on Monday showed that the fund had purchased 1.67 million call options on BBBY stock. Cohen's options consist of 1.12 million $60 strike calls; 44,400 $75 strike calls; and 500,000 $80 strike calls. All of the options expire in January 2023."

To characterize such purchases as unusual would be an understatement. Once the transactions were revealed, the predictable stampede of buying that ensued was historic. In the days that followed, more than one billion shares of the company traded hands, and the stock reached an intra-day high of $30 a share on Wednesday, August 17.

What did Cohen do next? He dumped every share and call option he owned into the resulting orgy of liquidity. When confirmation of Cohen's trades was made public, both the stock price and the brokerage accounts of thousands of retail investors were crushed...

Cohen's attorneys will no doubt argue that he did absolutely nothing wrong, that he was well within his rights to pursue each transaction in the manner in which he did, and that – unlike other would-be pump and dumpers – he properly disclosed his activity in filings with the SEC at every step of the way. In the unlikely event Gensler does anything about the matter, Cohen will have to recycle but a minuscule fraction of his BBBY gains in hiring an army of attorneys to overwhelm the public servants assigned to hold him to account.

As it becomes clear Cohen will likely suffer no consequences for his actions, expect countless other ethically challenged big-name investors to replicate his approach. The resulting damage to the legitimacy of our capital markets will be significant. We predict a total free-for-all.

We close by pondering what goes through the mind of somebody like Cohen. He was already wealthy beyond anybody's wildest dreams and widely admired for his business acumen. Why burn your reputation and risk action by the authorities just to add a bit more money to the giant pile you already have and could never hope to spend? What a curse to be trapped in a prison of self-imposed insatiability. Around the Chicken Coop, we define rich as having enough money to pursue your passions in life and the wisdom to do just that. Cohen might have a ton of money, but he certainly isn't rich.

My take: I have no problem with – in fact, I even applaud – Cohen buying a big stake in Bed Bath & Beyond in the hopes of helping turn the company around.

And I similarly have no problem with him, months later, concluding (correctly, in my opinion) that nothing can be done, the business is heading for bankruptcy, and therefore deciding to sell his entire stake.

My problem is with what he appears to have done on his way out...

On Friday, August 12, the stock closed at $12.95 per share. Had Cohen sold his 9.45 million shares and 1.67 million call options at that price, he would have taken a $20 million to $30 million loss, given that he acquired his stake at an average price of $15.34 per share.

Nobody likes to take a loss, so to avoid it, I think Cohen launched a nefarious scheme...

Noting that the stock had risen 21.8% on August 12, likely driven by chatter on the WallStreetBets message board on Reddit, he correctly realized that these meme stock speculators would be driven into a frenzy if he refiled an amended Schedule 13D showing his stock position and, even better, a Schedule 3 showing his highly speculative call option positions, which is what he did the following Monday and Tuesday.

Note that these filings didn't reveal any new purchases – they merely showed the same holdings as his previous filings in March – but the clueless rubes on the message boards didn't understand this (as Cohen no doubt expected). Thus, believing that Cohen was buying BBBY stock and options, they ran the stock up to a high of $28.60 per share on Tuesday, August 16 and $30 per share the next day – and Cohen then dumped his entire stake on them.

Cohen will, of course, claim that he had no intention of selling when he made those filings – rather, that he opportunistically sold only when the spike in volume and price occurred – but if you believe this, please contact me as I have a bridge in Brooklyn to sell you...

When Cohen filed the next day that he had sold everything, BBBY shares of course collapsed and closed the week at $11.03 (they were trading around $9 this morning).

I estimate that Cohen's filings goosed the stock by at least $10 per share, meaning that he pocketed an estimated $110 million more than he would have had he quietly sold without making the two filings...

In my mind, that's $110 million that he took from the pockets of average Americans and put in his own.

As a result, however, his reputation is destroyed and he may be investigated by the SEC, as I've called for.

So was it worth it? Not in my book, but perhaps in his...

Here's an article about it in yesterday's Wall Street Journal: Ryan Cohen's Bed Bath & Beyond Stock Sales Highlight Gray Area in Disclosure. Excerpt:

Within minutes or hours of the ownership disclosure, Mr. Cohen began selling. Individual investors "have no idea he is dumping the stock against them," said Joshua Mitts, a law professor at Columbia University who specializes in analytical research on trading strategies.

The Securities and Exchange Commission could investigate whether Mr. Cohen had a plan to sell before he filed the Aug. 16 update that he should have disclosed, according to former regulators and law professors who specialize in securities law. The SEC's enforcement division hasn't contacted him, according to a person familiar with the matter.

"The question here is at the time that Cohen filed that trivial update, had he firmed up his decision to sell?" said Keith Higgins, a former director of the SEC division that oversees public-company disclosures. "And if he did or if he had, that omission is problematic."

A person familiar with Mr. Cohen's trading said his filings complied with rules, and he didn't make any offers or seek any prices for his Bed Bath & Beyond shares before making the Aug. 16 ownership disclosure update.

Many large investors don't formulate written plans to buy or sell, to avoid triggering the requirement to update the ownership disclosure, said Adam Pritchard, a securities and corporate law professor at the University of Michigan. "If you are properly lawyered, you don't have a plan until you decide you are going to sell," Mr. Pritchard said...

Some analysts say Mr. Cohen took advantage of the exuberance of those who favor speculative securities known as meme stocks. These investors, who call themselves "apes," are among individuals who purchased a net $131 million of Bed Bath & Beyond shares on Aug. 16 and 17, according to Vanda Research. Filings show Mr. Cohen sold $178 million of the stock over that period.

"The apes have a target on their back," said Daniel Taylor, an accounting professor at the University of Pennsylvania's Wharton School of Business who studies insider trading. "It's either the CEOs of the companies who are going to exploit that or these outside individuals like Ryan Cohen."

My take: Wealthy, sophisticated, and/or connected people have been exploiting the ignorance and/or greed of average folks since time immemorial, so what I suspect Cohen did is simply a new twist on an old story. But that doesn't make it right...

Sadly, I think he'll get away with it, as he doesn't appear to have broken any laws. But I hope the SEC tries to deter behavior like this in the future by thoroughly investigating Cohen!

3) Speaking of total disgraces, this one not only costs average folks money, but also lives... Kudos to The New Yorker for this excellent piece of investigative journalism: When Private Equity Takes Over a Nursing Home. Excerpt:

Since the turn of the century, private-equity investment in nursing homes has grown from five billion to a hundred billion dollars. The purpose of such investments – their so-called value proposition – is to increase efficiency. Management and administrative services can be centralized, and excess costs and staffing trimmed. In the autumn of 2019, Atul Gupta, an economist at the University of Pennsylvania, set out with a team of researchers to measure how these changes affected nursing-home residents. They sifted through more than a hundred private-equity deals that took place between 2004 and 2015, and linked each deal to categories of resident outcomes, such as mobility and self-reported pain intensity.

The data revealed a troubling trend: when private-equity firms acquired nursing homes, deaths among residents increased by an average of 10%. "At first, we didn't believe it," Gupta told me. "We thought that there was a mistake." His team reexamined its models, testing the assumptions that informed them. "But the result was very robust," Gupta said.

Cost cutting is to be expected in any business, but nursing homes are particularly vulnerable. Staffing often represents the largest operating cost on a nursing home's ledger. So, when firms buy a home, they cut staff. However, this business model has a fatal flaw. "Nurse availability," Gupta and his colleagues wrote, "is the most important determinant of quality of care."

At homes with fewer direct-care nurses, residents are bathed less. They fall more, because there are fewer hands to help them to the bathroom or into bed. They suffer more dehydration, malnutrition, and weight loss, and higher self-reported pain levels. They develop more pressure ulcers and a greater number of infections. They make more emergency-room visits, and they're hospitalized more often. "They get all kinds of problems that could be prevented," Charlene Harrington, a professor emeritus of sociology and nursing at the University of California, San Francisco, said, of residents at homes with lower nurse-staffing levels. "It's criminal."

Whereas staffing levels influence costs, occupancy rates often determine profits. Firms have an incentive to fill more beds. The problem is that they have little motivation to make those beds safe or clean. Medicare pays five hundred and eighty-five dollars per patient per day; Medicaid pays two hundred and forty-five. Neither adjusts the rate for quality, resident satisfaction, or reputation. If a nursing home can bring costs below the daily rates of Medicare and Medicaid, it can pocket the difference. "As it stands, the incentives are not aligned," Gupta said. "But that doesn't mean that those incentives cannot be changed."

4) Ever since I helped start Teach for America in 1989 as my first job out of college, I've been deeply involved with efforts to reform and improve our educational system, particularly among K-12 public schools that serve low-income students.

I believe it is one of the greatest stains on our country today that the quality of public school a child attends is largely determined by two factors: the color of their skin and their zip code. This flies in the face of one of the core things America is supposed to stand for: that no matter what circumstances you were born into, you'll get a good education that gives you a fair shot at the American Dream...

Below is an e-mail I sent recently to my school reform e-mail list (if you would like to be added to it, simply send a blank e-mail to schoolreform-subscribe@mailer.kasecapital.com)...

If I were to pick the single most important educational measure, it would be fourth-grade reading.

Right about this time, the curriculum shifts from learning to read, to reading to learn. At this point, all of the textbooks assume that a child is a proficient reader, so if he/she isn't, it's almost game over. He/she will likely struggle to keep up in every class, falling further and further behind, and likely dropping out – if not in high school, then certainly in college. As the article below notes: "A 2011 study from the Annie E. Casey Foundation found that students who don't read proficiently by the end of third grade are four times as likely to eventually drop out of school as those who do."

On this front, our performance is disastrous! According to the latest (2019) NAEP test, only 35% of American fourth graders are proficient readers, with huge racial disparities: While 44% of white children are proficient, only 23% of Hispanic/Latino and 18% of black children are.

What turns this story from tragic to infuriating is that our children are the victims of educational malpractice being committed by the majority of America's elementary school teachers.

Imagine for a moment that there was incontrovertible scientific evidence that ischemic heart disease, the world's biggest killer, responsible for 16% of all deaths, was best treated in a certain way, but a majority of doctors decided they didn't like that way and instead used discredited, inferior treatments that resulted in significantly higher mortality. There would of course be an outcry until doctors changed their ways...

Well, that's what's happening right now when it comes to the most important thing our schools do: teaching children to read.

As this Time magazine article, Inside the Massive Effort to Change the Way Kids Are Taught to Read, notes, "of more than 600 elementary-school teachers by Education Week found that more than two-thirds used a balanced-literacy philosophy."

This is clearly inferior, as the article explains:

the product of a robust ability to decode letters, and a strong vocabulary.

There are many schools of thought on how best to aid this process, but the main contretemps has been about whether kids need to be taught how to sound out words explicitly or whether, if you give them enough examples and time, they'll figure out the patterns. The latter theory, sometimes known as whole language, says teaching phonics is boring and repetitive, and a large percentage of English words diverge from the rules. (Hello there, though, thought, through, trough, and tough!)

But if you immerse children in beautiful stories, they'll be motivated to crack the code, to recognize each word. The counterargument is that reading is as connected to hearing as it is to sight. It begins, phonics advocates say, with speech. This understanding, and the data that supports it, has become known as the science of reading.

This debate was supposedly settled in 2000, when the National Reading Panel, a big group of literacy experts that examined hundreds of studies on what instruction kids need to read, released a report. It recommended explicit instruction in the things Weaver's petition asks for: phonemic awareness, phonics, fluency, vocabulary, and comprehension. This was a victory for the phonics camps. But it is one thing to declare a war is over and another to parcel out territory.

Thus was born the notion of balanced literacy, which was an attempt to correct the ship's course, rather than turn it around completely. Schools would introduce more instruction in the link between sounds and letters, but that could be sprinkled in with other methods teachers thought worked, like prompting kids to use context clues (including, say, pictures) when they came to a word they didn't know.

The net result, says Timothy Shanahan, a former director of reading for Chicago schools and an early-literacy expert who was on the panel, was that balanced literacy came to mean whatever anybody wanted it to. Schools did not have to buy expensive new curriculums. Districts did not have to retrain their teachers. Teachers could add some lessons on phonics, but they didn't have to hit reset on the way they taught.

A 2019 survey of more than 600 elementary-school teachers by Education Week found that more than two-thirds used a balanced-literacy philosophy, although most also said they incorporated "a lot" of phonics. "The idea was each group would get some of what they wanted," says Shanahan. "I've got to admit, I always thought that was a bad idea. It seemed to me that you should just go with the research."

What could possibly explain so many teachers ignoring the evidence about which method of teaching reading works best? It's mostly resistance to changing entrenched ways of doing things, but the article also highlights another reason – woke idiocy:

The teachers felt like curriculum robots – and pushed back. "This seems dehumanizing, this is colonizing, this is the man telling us what to do," says Weaver, describing their response to the approach. "So we fought tooth and nail as a teacher group to throw that out." It was replaced in 2015 by a curriculum that emphasized rich literary experiences. "Those who wanted to fight for social justice, they figured that this new progressive way of teaching reading was the way," he says.

Thank goodness parents, especially those of dyslexic children, got angry about the educational malpractice being committed against their children and started raising a big fuss:

The parents then did what educated, wealthy people do when they feel slighted: they looked at the research, paid for expensive testing, called their representatives, and contacted their friends in the press.

What they found was that the methods many teachers were using were not supported by the data. They were supported by theories, observations, hopes, and, some would argue, a few guru-like figures. Just as most children, no matter how many times they've been in a car, still need to be taught to drive, most readers benefit from being explicitly taught how sounds and letters go together. This is true not just for dyslexics (who represent about 10% of all learners) but for the majority of readers.

Thankfully, some states are beginning to act:

State legislatures, which have been getting an earful from dyslexia activists for years, have begun to act. From 2013 to Aug. 1, 30 states have passed laws or enacted new policies related to "evidence-based" reading instruction. Mississippi was one of the first, and in 2019 it became the only state in the nation to meaningfully improve its fourth-grade reading scores. The results were touted as the "Mississippi Miracle."

But much more needs to be done:

But even with the Holy Trinity of school change – legislatures, researchers, and activist parents – on the case, getting teachers to use new techniques has been an uphill battle. "Passing the law was the first step for us, and it was the easy thing," says Burk.

What others tout as a miracle, she notes, was more like a slow climb, with steadfast funding, tireless messaging, and a top-to-bottom reorganization of the way Mississippi's youngest readers were taught. "The hardest part was convincing others who had done things a certain way for such a long time that we needed to make a shift. We had to make a shift in our instructional practices; we had to make a shift in the curricula that we were purchasing; and also we had to just really come to terms with the fact that there were so many of our teachers who had come through our education-preparation programs who still were not equipped to teach children who struggle how to read."

Mississippi retrained all its teachers using LETRS (Language Essentials for Teachers of Reading and Spelling), an intensive training module that takes them all the way back to understanding the sounds in speech, what is known as phonemic awareness.

Many states have followed suit. But retraining busy teachers takes a while and doesn't necessarily change what they do in the classroom. "There are tens of thousands of schools in the United States, and nobody really monitors what goes on in those schools," says Shanahan, who in nonpandemic times visits 40 or 50 schools a year. "A lot of times the teachers have no idea that they're not teaching things that are beneficial to the kids."

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.