This Well-Known Stock Is Ready to Plunge

Don’t believe the recent rally in Barnes & Noble Inc. (NYSE: BKS) stock – it’s not going to stick.

In fact, this stock is ready to plunge.

The share price has been on a roller coaster ride all year. It climbed in February to over $18, fell to almost $8 in April, rose to around $21 in June, and then slipped to $10 in October.

Now it’s on a tear again. It’s moved up by 5% to 10% per day lately, soaring 65% in the past month.

But this move isn’t based on strong fundamentals and good earnings. In fact, Barnes & Noble’s business faces serious obstacles.

The book-retailing sector has been struggling with the growing popularity of eBooks. While Barnes & Noble has benefited from deep-pocket investors who have built a major stake in the company, the fundamentals aren’t there to support this investment. It is extremely overleveraged, and the company has reached the stage where it’s borrowing money to pay high dividends.

That is never a long-lasting business model.

The market agrees with this sentiment, building one of the largest short positions in a public stock.

You see, I believe the majority of Barnes & Noble’s share price climb is due to shorts covering their positions. As of Oct. 14, 46.7% of the float was short.

Once this short cover period is over, I expect the stock to fall again, dipping even lower than before.

So it’s time to sell Barnes & Noble Inc., before the stock rally collapses and all you’re left with is a weak company in a struggling sector. (**)

Barnes & Noble Inc.: A Dying Breed

Barnes & Noble Inc. is one of the last major bookstore chains left in America. The Internet and new competitors like Amazon.com Inc. (Nasdaq: AMZN), along with the proliferation of eBooks, have ravaged the sector.

Amazon.com completely changed how people shopped for reading material. Once eReaders hit the struggling book sector, the ability of bookstores to pay rent, power, lights, and salaries at physical locations went the way of the dodo bird: extinct.

In the end, there is only Barnes & Noble. As of Oct. 20 they still operate 704 bookstores in 50 states, as well as 635 college bookstores serving 4.6 million students and faculty. It also operates Barnes & Noble eBookstore and provides Barnes & Noble eReader software.

Its most famous bricks & mortar competitor, Borders Group Inc. (PINK: BGPIQ), was dissolved in bankruptcy court this year. This helped boost Barnes & Noble’s sales by 2% last quarter.

But the company still lost $57 million, or 99 cents a share. Even with sales getting a $150 million to $200 million lift from the Borders closing, B&N is predicting a full-year loss of 10 cents to 50 cents a share. It will report third-quarter earnings Thursday, Dec. 1.

Even its Nook Tablet won’t boost the company into positive territory. While it has helped sales, it faces tough competition from fresh models of the Amazon Kindle and the tablet winner, the Apple Inc. (Nasdaq: AAPL) iPad 2.

The market currently gives Barnes & Noble a market cap of $850 million; however, once you take net cash and debt levels (otherwise known as enterprise value) into consideration, the company is valued at $1.4 billion.

The company has a reported forward dividend of rate of 8%. However, this was due to a large $1.00 dividend paid in December 2010, and will not be maintained with falling profits.

Action to Take: Sell Barnes & Noble Inc. (NYSE: BKS) (**).

The stock is hitting new 52-week highs due to a short squeeze in the market itself, but the fundamentals of the company haven’t changed.

Let’s use this burst of short covering to sell your shares at market. There are significantly safer investments out there that pay a real dividend. Let’s instead focus on buying fundamentally sound companies that we can hold for the long term.

(**) Special Note of Disclosure: Jack Barnes has no interest in Barnes & Noble Inc. (NYSE: BKS).

–Jack BarnesSource: Money Morning

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