A Form 4 filing with the SEC this week revealed that Abrams Capital Management purchased another 378,396 shares of Barnes & Noble Education Inc. (NYSE:BNED), at a weighted average price of $12.84 per share. Following the transaction, David Abrams’ investment firm currently holds 6.68 million shares of the recently spun-off company, which account for 13.86% of its outstanding common stock. Earlier this month, Abrams Capital also reported acquiring 68,244 shares of Barnes & Noble Education, so it is quite evident that Abrams and his team believe that the stock is an attractive buying opportunity at the moment.
Abrams Capital Management LP is a Boston-based hedge fund established by David Abrams back in 1999. The investment firm employs a fundamental, value-oriented investing approach and holds roughly $8 billion in assets under management. Abrams Capital is focused on a wide range of asset types, investment strategies, market sectors, market cycles, and industries. To be more specific, Abrams’ hedge fund primarily invests in distressed securities, private and/or illiquid securities, and global equity and debt securities. It is worth noting that Abrams Capital holds its investments over a long-term time horizon, so one should not assume that David Abrams expects immediate returns from his Barnes & Noble Education investment.
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Why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect the hedge funds’ activities. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small cap stock picks among hedge funds also bested passive index funds by around 60 percentage points over the 36 month period beginning from September 2012, returning 118% (read the details here).
Let’s now move on to Barnes & Noble Education Inc. (NYSE:BNED), which completed a legal separation from its parent Barnes & Noble Inc. (NYSE:BKS) on August 2 and began operating as an independent, publicly-traded company. The spun-off company is one of the largest contract operators of bookstores on college and university campuses around the United States. The shares of Barnes & Noble Education have lost slightly over 13% since they started trading on the New York Stock Exchange, but that doesn’t mean that there isn’t a bright future ahead for the company.
Barnes & Noble Education reported its first post-IPO earnings report since our last coverage, so we should take a thorough look at the financial figures buried within. The company posted sales of $239.0 million in the first quarter of fiscal 2016, up by 5.9% year-over-year. Even though this is a seasonal low quarter for Barnes & Noble Education, its comparable sales increased by 1.8% year-over-year. In the meantime, the company keeps signing new contracts, with 21 new stores opened during the quarter that are expected to generate annual sales of $45.0 million. New store openings have been a key driver of growth for the company’s business, so Barnes & Noble Education appears to be on the right track to deliver growth in the years ahead. Usually, the company operates its stores under multi-year management service agreements that grant it the right to operate the official school bookstore in exchange for a percentage of store sales. Therefore, the newly-signed contracts will surely boost the company’s sales in the upcoming quarters. Nevertheless, the year-over-year growth in sales did not assist Barnes & Noble Education in tightening its loss, which widened to $26.9 million from $26.2 million.
Given that the first quarter represents a seasonal low quarter, the fiscal 2016 second quarter results, which will be released around December 8, will provide more insights into Barnes & Noble Education Inc. (NYSE:BNED)’s long-term direction. The company’s business is highly seasonal, as the main portion of sales are realized during the second and third fiscal quarters, when college students tend to acquire or rent textbooks for the upcoming semesters. In the meantime, approximately 53% of the U.S college and university-affiliated bookstores are managed by their own institutions, so Barnes & Noble Education still sees a lot of potential in the industry. While it’s unlikely that the company will be a “blockbuster” stock that can deliver mammoth returns, it will surely represent a stable and attractive investment.
Disclosure: None
