Is Barnes & Noble, Inc. (BKS) Going the Way of Borders

Top funds sold prior to the drop

Barnes & Noble, Inc. (NYSE:BKS) was brought to our attention last month when our analysis of the collective buying and selling activity by 79 of our hand-picked legendary or guru fund managers ranked its stock at the bottom, at a GuruRank of 1.0 on a 1-to-5 scale (source: GuruFundPicks.com). Taken together, these top fund managers sold 0.88 million shares in the latest available March quarter, a sharp 31% reduction from their 2.87 million share position in the company at the end of the prior December quarter.

Our take

Where does B&N stock go from here? A B&N minus its Nook e-reader and tablet devices looks eerily similar to the now-defunct Borders Group, a rival bookstore chain that had to close its doors in 2011. But current B&N shareholders need not panic.

At prices in the $15-$16 range, its shares now trade at 0.14 times sales and 1.5 times book value, well below the 1.0 and 1.9 average for its peers in the diversified retail group (based on financial data from Zacks.com). Also, its only pure-play retail bookstore peer, Books A Million (NASDAQ:BAMM) , is trading at just 0.08 times sales and 0.4 times book value, while online rival Amazon’s shares are trading at 1.9 times sales and 14.6 times book value.

Using even Books A Million’s multiples — a conservative assumption, given Barnes & Noble, Inc. (NYSE:BKS)’s far better competitive position — would value B&N’s bookstore business alone at a minimum of $300 million to $500 million. The possibility of Microsoft buying the e-Book business puts an effective floor on the stock in the $13-$15 range. And the upside potential is high, given that the buyout could be as high as $1 billion or more.

Furthermore, the stock is ripe for a short-squeeze once the selling is over. B&N’s short interest is up to 7.4 million shares, accounting for 28% of the outstanding shares. We believe that with limited downside and a potentially high upside, the risk-to-reward ratio for the stock is attractive here, and we would start scaling into it, adding more as it dips below $15 towards the $13 range that we consider to be a floor for the stock.

Manish Babla of GuruFundPicks.com has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, and Google. Manish is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Is Barnes & Noble Going the Way of Borders originally appeared on Fool.com and is written by Manish Babla.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.