Easy Come, Easy Go

On Tuesday, rumors of a possible tie-up between Barnes & Noble (BKS) and the new Apple (AAPL) iPad that was to be released the next day. The stock jumped from the mid $17s all the way up to $20.68 before moderating in the afternoon to settle well above $19 per share. As rumor had it the new product from the consumer electronics giant would possibly incorporate some of Barnes & Noble’s ebook technology developed for the Nook and possibly their ebookstore.

Well, Apple’s much anticipated event has come and gone and there was no mention of Barnes & Noble, and as most expected the iPad device will have its own ebookstore. The stock has given back nearly all of the gains it received from the false hype around the event. Anyone who bought BKS hoping to ride the rumor to a quick and easy profit could be down as much as 14% depending on what price they got.

It just goes to show you that investors need to be very careful about investing based on a rumor such as this, and it really is not investing as much as speculating anyway. If you find yourself among those that got burned by the rumor mill, we would recommend holding onto BKS shares. We have an Undervalued rating on BKS at the current level as it sells at levels that are well below the historically normal ranges of price-to-sales and price-to-cash earnings. For example, over the past ten years BKS has normally traded in a price-to-sales range of .29x to .51x, but is currently only .21x. Similarly, the current level of price-to-cash earnings is around 4.2x which is well below the historical range of 5.1x and 9.2x.

These rumors have a way of taking on a life of their own, and some investors cannot resist the prospect of a quick, painless return. Anyone looking to make a quick buck by piggy-backing on Apple’s big announcement will likely be disappointed, but there are far worse stocks that an investor could be stuck holding for a longer period of time.

Barnes & Noble: Easy Come, Easy Go

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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