Is Barnes & Noble Poised to Head Higher?

With shares of Barnes & Noble (NYSE:BKS) trading around $18, 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 today reported sales and earnings for its fiscal 2014 third-quarter ended January 25, 2014. “During the third-quarter, the company significantly improved its balance sheet and bottom line, while making real progress on our strategic priorities,” said Michael P. Huseby, Chief Executive Officer of Barnes & Noble, Inc. “Retail’s core comparable store sales benefited from a strong title line-up, strong execution and an effective advertising campaign. College entered into the spring back-to-school rush and saw continued growth in its higher margin textbook rental business. This resulted in a slight EBITDA increase for College, even after funding and developing our digital educational applications. We expect the soft launch of our higher education digital product before the end of this fiscal year. NOOK losses narrowed significantly as we achieved our objective of selling through much of our pre-holiday device inventory, while managing promotions to optimize sales.”

T = Technicals on the Stock Chart Are Strong

Barnes & Noble stock has been volatile in recent times. The stock is currently trading near highs for the year and looks set 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 above its rising key averages which signal neutral to bullish 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

55.18%

40%

38%

What does this mean? This means that investors or traders are buying a 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

Flat

Average

April Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

514.29%

314.29%

-10.26%

-110.37%

Revenue Growth (Y-O-Y)

-1.26%

-8.01%

-8.53%

-4.70%

Earnings Reaction

3.69%*

-5.96%

-12.35%

-17.05%

Barnes & Noble has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Barnes & Noble’s recent earnings announcements.

* As of this writing

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

23.68%

-9.21%

-7.58%

9.33%

5.05%

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 today reported fourth quarter earnings that left investors pleased. The stock has been volatile and is currently trading near highs for the year. Over the last four quarters, earnings have been rising while revenues have been declining. Relative to its peers and sector, Barnes & Noble has been a relative year-to-date performance leader. Look for Barnes & Noble to OUTPERFORM.

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