The Contrarian Blog

Barnes & Noble Needs More From Its Nook

by Jim Cunningham 6/20/2012 1:27 PM
Stocks quoted in this article:
Publication: "The Wall Street Journal"
Publication title: "Barnes's Nook Seeks Niche"
Publication Date: 6/19/2012
Brief Summary:

To the chagrin of some investors and shareholders, Barnes & Noble, Inc. (BKS) on Tuesday released its very first report for its Nook e-reader business, showing that revenue fell 11% to $164 million, from $183 million a year earlier. And as one Morningstar analyst said of the results, "Their costs have been greater than expected and they've seen more competition than they expected."

Indeed, BKS' Nook has been hit from all sides since its debut, battling rivals like Apple (AAPL) and Amazon.com (AMZN) for a share of a "consumer marketplace that is highly price sensitive and appears to be embracing color tablets at the expense of simple black-and-white e-readers." Most recently, Microsoft (MSFT) joined the other big-name competitors with the unveiling of its new tablet, Surface. This development could overshadow a recent deal in which MSFT invested $605 million in the Nook digital business and BKS' college bookstore chain. BKS also faces financial hurdles following "a proposed Justice Department settlement with three leading publishers over alleged e-book pricing collusion." As the author points out, AMZN "has been willing to price [e-book] best-sellers at below cost, in order to sell more e-readers, a pricing strategy that would be painful for Barnes to match."

Contrarian Takeaway:

Barnes & Noble has turned in a lackluster performance on the charts recently, inching up almost 5% in 2012, but lopping off nearly 25% over the past year. In fact, the stock has lagged the broader S&P 500 Index (SPX) by roughly 16% during the past 20 sessions. Since jumping to the $26 level on April 30 -- getting a boost from the investment from Microsoft -- the shares have drifted some 40% lower. This decline has pulled BKS back below the $15-$16 region, which acted as a technical ceiling for most of 2012.

Checking out the sentiment backdrop, it appears that several traders believe things could get worse for BKS. Even though short interest declined 21.8% during the past month, shorted shares still account for a significant 49.4% of the security's available float. At BKS' average pace of trading, it would take almost two weeks for all of these pessimistic positions to unwind.

However, optimism is alive and well in the options pits, as evidenced by the stock's 10-day call/put volume ratio of 5.55 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio arrives in the 76th percentile of its annual range, signaling that speculators on these exchanges have bought calls over puts at a faster-than-usual pace over the past couple of weeks. Given the elevated short-to-float ratio, some of these calls may have been purchased as hedges.

Even the analyst crowd is positively slanted toward the e-book retailer. The average 12-month price target sits at $21.08, which represents a 44% premium to its June 19 settlement of $14.63. Plus, two out of three brokerages following BKS consider it worthy of a "strong buy."

Considering BKS' fundamental and technical predicament, a capitulation by upbeat analysts or bullish options traders could weigh heavily on the stock in near term.


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