Will Barnes & Noble Recover?

With shares of Barnes & Noble (NYSE:BKS) trading around $16, is BKS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Barnes & Noble is a content, commerce, and technology book-selling company that provides customers access to books, magazines, newspapers, and other content across its multichannel distribution platform. The company operates 1,338 bookstores in 50 states, 647 bookstores on college campuses, and one e-commerce site. It also develops digital content products and software. Barnes & Noble operates in three segments: B&N Retail, B&N College, and Nook.

Barnes & Noble’s move this week to lay off a number of engineering staff supporting its struggling Nook e-reader is stirring speculation about the company’s plans for the device. A report Monday from Business Insider said the company fired its Nook hardware engineers, but Barnes & Noble said that was not accurate. Although the retailer did not specify the number of cuts, fewer than 100 people lost their jobs, the New York Times reported.

Still, the move cast further doubt on the future for Nook, the e-reader that the company has invested hundreds of millions dollars in to promote as a rival to Amazon’s (NASDAQ:AMZN) Kindle and Apple’s (NASDAQ:AAPL) iPad. After news of the layoffs surfaced, Barnes & Noble sought to tamp down talk about its commitment to Nook by expressing confidence in the unit’s management. “As we’ve aligned Nook’s cost structure with business realities, staffing levels in certain areas of our organization have changed, leading to some job eliminations,” said spokesperson Mary Ellen Keating in an emailed statement. “We believe we have a strong management team in place at Nook, having recruited significant new talent.”

T = Technicals on the Stock Chart Are Mixed

Barnes & Noble stock has been volatile in recent times. The stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Barnes & Noble is trading between its rising key averages which signal neutral price action in the near-term.

BKS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Barnes & Noble options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Barnes & Noble options

64.25%

93%

90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

March Options

Average

Average

April Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Barnes & Noble’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Barnes & Noble look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

314.29%

-10.26%

-110.37%

-125.35%

Revenue Growth (Y-O-Y)

-8.01%

-8.53%

-4.70%

-8.82%

Earnings Reaction

-5.96%

-12.35%

-17.05%

3.34%

Barnes & Noble has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Barnes & Noble’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Barnes & Noble stock done relative to its peers, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and sector?

Barnes & Noble

Amazon

Apple

Google

Sector

Year-to-Date Return

6.35%

-10.30%

-4.50%

5.01%

-1.86%

Barnes & Noble has been a relative performance leader, year-to-date.

Conclusion

Barnes & Noble is the last remaining nationwide bookstore, and it continues to struggle against current competition. The company’s move to lay off a number of engineering staff supporting its struggling Nook e-reader is stirring speculation about the company’s plans for the device. The stock has been volatile and is currently surging higher. Over the last four quarters, earnings have been rising while revenues have been declining, which has produced conflicting feelings among investors. Relative to its peers and sector, Barnes & Noble has been a relative year-to-date performance leader. WAIT AND SEE if Barnes & Noble can stabilize this coming quarter.

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