Bed Bath & Beyond (NASDAQ:BBBY) has staved off bankruptcy thanks to its recent capital raising efforts. The question now is whether this makes BBBY stock a buy or a sell.

Consider it the latter the latter in my view. In order to raise this additional cash from Hudson Bay Capital Management, the company had to agree to terms that make this wager a proposition highly favorable from a risk/return standpoint to Hudson Bay.

Per the terms of the deal, this investor could reap most of the potential upside, with certain mechanisms in place to minimize downside risk. This comes at the expense of outside investors, who now face the prospect of heavy dilution, with limited upside potential.

Shares have plunged since this capital raise was first announced last month. The market knows full well to stay away, and you should too.

BBBY Stock and the Hudson Bay Deal

In late January, it seemed to be all but certain that Bed Bath & Beyond was on its way to a Chapter 11 reorganization, or worse, a Chapter 7 liquidation. However, at the eleventh hour, the company could secure one last lifeline from Hudson Bay.

On Feb. 6, the retailer announced the hedge fund agreed to provide up to $1.025 billion in financing, via a complex deal involving the purchase of convertible preferred stock, options to buy convertible preferred stock, as well as options to buy common shares of BBBY stock.

Hudson Bay provided an initial $225 million when the deal was first announced. The fund has since invested an additional $135 million, with plans to provide another $100 million next month. This cash infusion is enabling Bed Bath & Beyond to keep the lights on, while it executes a turnaround.

However, while at first this may sound like promising news, most outside investors have not seen this as a cause for celebration, in fact, quite the contrary. While initially spiking by over 92% on Feb. 6, shares have since cratered, from $5.86 per share, down to just $1.15 per share today.

Why Even the Meme Crowd is Staying Away

Based on the deal’s structure, other owners of BBBY stock stand to lose out from the Hudson Bay deal, in two different ways. First, the conversion terms with the preferred shares are such that this hedge fund could profit, even if a Bed, Bath & Beyond comeback fails to fully take shape.

As long as the stock stays above 71.6 cents per share, Hudson Bay can convert its preferred shares into common shares of BBBY, at an 8% discount to BBBY’s volume-weighted average price over the ten trading days preceding the conversion. Assuming Hudson Bay eventually converts all of its preferred shares and sells them into the open market, this means heavy dilution ahead.

Second, beyond locking in profits from the preferred stock aspect to the deal, if Bed Bath & Beyond manages to survive, and again become a profitable enterprise, Hudson Bay can exercise its warrants, allowing it to capture the lion’s share of the potential upside.

Considering the extent to which the odds are stacked in the favor of this fund, it’s not a shock that the meme stock community, known for their disdain for Wall Street insiders, have abandoned BBBY.

Bottom Line

It’s not guaranteed Hudson Bay will profit from its Bed Bath & Beyond investment. There’s a reason the rest of the smart money continues to bet the other side, as evidenced by BBBY’s high level of short interest (72.05%).

However, if BBBY keeps dropping, Hudson Bay may have little incentive to provide further funding. This increases the chances that the company runs out of cash and files for bankruptcy, sending the stock to zero.

On the flip side, if shares hold steady, and the fund continues to provide more cash, even if the company survives, the above warrants issued to Hudson Bay cap your potential gains.

In short, while still an asymmetric wager for Hudson Bay, BBBY stock is a losing proposition for outside investors. Follow the lead of the meme crowd and stay away.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.