Barnes & Noble Shares Climb 18% After Jana Partners Buy In

Barnes & Noble’s (BKS) share prices gained more than 18% last Monday after hedge fund Jana Partners bought a 12% stake in the company.

Jana Partners LLC, managed by Barry Rosenstein, disclosed late Friday that it bought almost seven million shares of Barnes & Noble, plus an option to buy an additional 250,000 shares at $13. Barnes & Noble’s stock price had been languishing in the $10 to $20 range for the past year, and closed at $13.03 in yesterday’s trading.

Jana Partners’ Barry Rosenstein believes in betting on the management teams of the companies he buys. He was also likes to invest in companies with strong cash flows. This philosophy seems to be working because as of October 2011, Jana Partners returned an amazing 200% since it started operations

Jana’s recent buy-in may seem promising for Barnes & Noble, which (by the way) incurred losses of more than $73 million last year. In contrast, its rival Amazon.com (AMZN), made a $631 million profit during the same period. Both companies sell books, e-books, e-readers, and other merchandise online, but Amazon.com trumps Barnes & Noble in terms of revenue, brands, and maybe even strategy. The New York Times reported that “the company (Barnes & Noble) has said it is turning itself around, in particular by investing heavily in its Nook e-book division, though the plan remains risky”. Although the company reported record sales for its nook e-reader, it is still unclear if they will be able to turn that into a profit. It is also unclear if the company will follow Amazon.com’s profitable strategy of selling content via streaming from the cloud.

So does this mean that Barnes & Noble is a buy? I would say not yet. Let Jana do what it plans to do with BKS and wait for the company to turn a profit. As of now, Jana’s plans as an investor in Barnes & Noble remain unclear, so I wouldn’t take a position in BKS right now. For all we know, Jana could lobby the shareholders to spin-off divisions just like what it did with Mcgraw Hill (MHP) last year. News of Barnes & Noble’s potential Nook spinoff is already out, and this could be a potential play for Jana. However, I must caution investors that these are all still just speculations.

On the other hand, investors that are really craving for a piece of Jana’s play in BKS can use a safer approach to speculation, and that is to buy long-term call options on BKS. These contracts are relatively “cheap” and and can be held for two to three years going forward, which is probably enough time for BKS to make a turnaround.