Is Barnes & Noble Undervalued?

With shares of Barnes & Noble (NYSE:BKS) trading around $16, is the stock an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze it with the relevant sections of our Cheat Sheet investing framework:

T = Trends for a Stock’s Movement

Barnes & Noble is a content, commerce, and technology book-selling company that provides customers access to books, magazines, newspapers, and other content across its multi-channel distribution platform. The company operates 1,338 bookstores in 50 states, 647 bookstores on college campuses, one e-commerce site, and develops digital content products and software. Barnes & Noble operates in three segments: B&N Retail, B&N College and Nook. As the last nationwide bookseller, Barnes & Noble may be preparing to close its doors — the company has struggled to compete with Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). Its founder, Leonard Riggio, suggested that the company may be able to survive if it splits its digital businesses from its physical stores.

T = Technicals on the Stock Chart are Weak

Barnes & Noble stock has seen a good amount of volatility in recent years. The stock is now seeing a severe drop from yearly highs after a negative earnings report. Analyzing the price trend and its strength can be done using key simple moving averages: 50-day (pink), 100-day (blue), and 200-day (yellow). As seen in the daily price chart below (source: Thinkorswim), Barnes & Noble is trading below its key averages, signaling neutral to bearish price action in the near-term.

Taking a look at the implied volatility and implied volatility skew levels of Barnes & Noble options may help determine if investors are bullish, neutral or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Barnes & Noble Options	55.54%	0%	0%

Investors or traders are buying a small amount of call and put options contracts, as compared to the past 30 and 90 trading days.

	Put IV Skew	Call IV Skew
July Options	Steep	Average
August Options	Steep	Average

As of Wednesday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a small amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates; the last four quarterly earnings announcement reactions also help gauge investor sentiment on Barnes & Noble’s stock. What do the last four quarterly earnings and year-over-year revenue growth figures for Barnes & Noble look like and, more importantly, how did the markets like these numbers?

	2013 Q1	2012 Q4	2012 Q3	2012 Q2
Earnings Growth (Y-O-Y)	-110.37%	-125.35%	76.47%	21.21%
Revenue Growth (Y-O-Y)	-4.70%	-8.82%	-0.39%	2.47%
Earnings Reaction	-17.05%	3.34%	-11.15%	-3.88%

Barnes & Noble has seen decreasing earnings and revenue figures in the last four quarters. From these numbers, the markets have been very disappointed with Barnes & Noble’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Barnes & Noble stock done relative to its peers, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and sector?

	Barnes & Noble	Amazon	Apple	Google	Sector
Year-to-Date Return	7.95%	10.51%	-25.36%	23.34%	9.76%

Barnes & Noble has been a relatively poor performer, year-to-date.

Conclusion

Barnes & Noble is the last remaining nationwide bookseller and has been struggling to make an impact in recent years. The stock has whipsawed this year and is now trading in a wide range extending back a couple of years. In the last four quarters, investors have been disappointed with the company as earnings and revenue figures have been decreasing. Relative to its peers and sector, Barnes & Noble has been a poor year-to-date performer. WAIT AND SEE what Barnes & Noble does in coming quarters.