JANA Partners has filed with the SEC to report that as of August 31st it had sold all its shares of Barnes & Noble, Inc. (NYSE:BKS). In early April the fund had reported owning 7 million shares- at the time, nearly 12% of the company’s shares outstanding- and had owned 5.6 million shares at the end of March after initiating in the bookstore in the first quarter of 2012. However, during the second quarter of the year, the fund had begun to sell shares. By the end of June it only owned 4.1 million shares and two months later it had closed its position.
Barnes & Noble, Inc. has had difficulty contending with Amazon.com, Inc. (NASDAQ:AMZN)’s growing dominance in the market for books and other products. It did not do as poorly as Borders- which sold its intellectual property assets to Barnes & Noble last year as it entered liquidation- but is still struggling. The Nook has been contending well with the Kindle Fire on the lower end of the tablet market, but the fact that we are now talking about “tablets” rather than “e-readers” underscores the fact that Barnes & Noble and Amazon were merely the first movers in a market that is now being entered by Google Inc (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and other hardware manufacturers. Barnes & Noble is thus competing with some of the most ambitious and aggressive companies in the technology industry, and in contrast to JANA’s sales Apple Inc (NASDAQ:AAPL), Google, and Microsoft lead our list of the ten most popular stocks among hedge funds for the second quarter. Furthermore, their competitors include at least two (Amazon and Microsoft) who seem perfectly willing to sell their product at a loss in order to build market share and establish a platform for digital sales and have the cash and capitalization to do so. Barnes & Noble, meanwhile, has only about $680 million in market cap and reported about $20 million in cash and cash equivalents on its most recent balance sheet.
In that report for the first quarter of the company’s fiscal year, ending in July, Barnes & Noble, Inc. at least managed to trim its net losses to $41 million compared to $57 million in the same period a year ago. A 2% increase in revenue, combined with slightly higher costs, enabled the company to become less unprofitable. Aside from the big boost in earnings that accompanies the Christmas season, however, Wall Street analysts are quite pessimistic about Barnes & Noble: it is expected to lose money in this fiscal year (which ends in April 2013) and in the next fiscal year as well.
With the departure of Barry Rosenstein’s JANA Partners (see what stocks the contrarian value investor does like) the hedge fund community looks even more sour on the stock than it did before. At the end of June, JANA Partners was by far the largest hedge fund holder of Barnes & Noble according to our database of 13F filings by hedge funds and other investors. The next largest position, of about 700,000 shares, belonged to Adage Capital Management, and this was about half the size of Adage’s stake from the beginning of the second quarter of the year. Adage was co-founded by two employees of Harvard Management Company, which invested $1.8 billion in the fund and also owns a minority interest. Billionaire Michael Price initiated a new position in the stock during the second quarter.
If there’s one plus for Barnes & Noble, it’s that its closest competitor, Amazon, trades at remarkably high earnings multiples. The forward P/E based on analyst estimates is 108, and the five-year PEG ratio is 9.9. We’ve become used to seeing forward earnings multiples around 10 in the current market environment, so to see a five-year PEG ratio at that level which implies a 34% annualized increase in EPS for the next five years sounds high. We also think it’s interesting to compare Barnes & Noble to the similarly beleaguered Best Buy Co., Inc. (NYSE:BBY), which is seeing Amazon’s online store eat into its big-box electronics retail business. Best Buy is actually looking at profits in its current fiscal year as well as the next one, and with a drop in its stock price over the last year trades at 6 times forward earnings estimates. It might be a more intriguing contrarian, “return of brick and mortar” pick than Barnes & Noble.