Is Barnes & Noble a Risky Investment?

books

With shares of Barnes & Noble (NYSE:BKS) trading around $15, 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 multi-channel distribution platform. The company operates 1,338 bookstores in 50 states, 647 bookstores on college campuses, one e-commerce site, and develops digital content products and software. Barnes & Noble operates in three segments: B&N Retail, B&N College, and Nook. As the last nationwide bookseller, Barnes & Noble will delay filing its fiscal year 2013 annual report on time as the book retailer goes through an accounting review that could lead to restatements. It also may be preparing to close its doors — the company has struggled to compete with Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). Its founder, Leonard Riggio, has suggested the company may be able to survive if it splits its digital businesses from its physical stores.

T = Technicals on the Stock Chart are Weak

Barnes & Noble stock has been whipsawing back and forth in the past several years. The stock has now collapsed after releasing a few negative projections. Analyzing the price trend and its strength can be done using key simple moving averages: 50-day (pink), 100-day (blue), and 200-day (yellow). As seen in the daily price chart below (source: Thinkorswim), Barnes & Noble is trading below its key averages, which signal neutral to bearish price action in the near term.

BKS

Taking a look at the implied volatility 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

54.40%

0%

0%

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

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of Thursday, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

E = Earnings Are Mixed Quarter-Over-Quarter

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

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-110.37%

-125.35%

76.47%

21.21%

Revenue Growth (Y-O-Y)

-4.70%

-8.82%

-0.39%

2.47%

Earnings Reaction

-17.05%

3.34%

-11.15%

-3.88%

Barnes & Noble has seen mixed earnings and decreasing revenue figures in the past four quarters. From these numbers, the markets have expected more from Barnes & Noble’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

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

Barnes & Noble

Amazon

Apple

Google

Sector

Year-to-Date Return

4.77%

9.67%

-25.82%

24.09%

9.14%

Barnes & Noble has been a weak relative performer, year-to-date.

Conclusion

Barnes & Noble is the last remaining nationwide bookseller but has faced problems with increased online competition. The stock has experienced a lot of volatility in recent years and seems to be struggling at current prices due to negative earnings releases. In the past four quarters, investors in the company have expected more as earnings have been mixed and revenues decreasing. Relative to its peers and sector, Barnes & Noble has been a weak year-to-date performer. WAIT AND SEE what Barnes & Noble does in coming quarters.

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