In My Good Books: BKS

 | Jun 12, 2014 | 12:00 PM EDT
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Last night after dinner, my wife realized that she was almost done with the book she was reading and needed another one to take to the beach. It just so happened that a Barnes and Noble (BKS) store was nearby, so at 9:30 PM we decided to pay a visit. I was excited too -- I was going to put my Peter Lynch hat and do some direct scuttlebutt research.

For those unaware, Peter Lynch was the famed mutual fund manager at Fidelity during the eighties and nineties, who noted that some of his best investment ideas didn't come from analysts, magazines, or stock screens but instead from direct interaction. He made a killing in Hanes (HBI) when his wife came home one day with a pair of L'eggs -- the famous pantyhose that were sold in an egg shell container at retailers and grocery stores. Lynch also scored a multi-bagger with Motel 6 after staying there once while traveling.

My investment in Chipotle Mexican Grill (CMG) two years ago when the shares were trading for 25x earnings -- a taboo for many value investors -- was a direct result of years of store visits and observation that confirmed that Chipotle was not a fad concept.

At Barnes and Noble last night, the first thing I noticed was that the store was moving with customers all over the place. More importantly, I observed the checkout line and for nearly 15 minutes without interruption it was constant, with customers buying books. In many cases, folks were buying more than one book; one lady bought a stack of nearly a dozen.

College-aged students were there, browsing; a father was buying test prep books for his teenage daughter; other parents were there with young children; and young adults and seniors were scattered throughout. If it wasn't for the fact that I was currently in the middle of two books already, I likely would have picked up a copy of Stress Test by former U.S. Treasury Secretary Tim Geithner. In fact, I did inquire if a copy of Manias, Crashes, and Bubbles by Charles Kindleberger was in stock -- it was not.

The point is that people are indeed buying books from bookstores. And as far as bookstores go, Barnes and Noble is the only game in town in terms of national footprint. Is BKS going to be a sizzling growth stock? Probably not. To be sure, shares trade at $20 as it is, up from $13 and near an all-time high for the stock over the past couple of years.

Yet the company has a market cap of $1.2 billion, no net debt, and over $200 million in net cash. It has 660 retail stores in all 50 states, or two thirds of the retail book market. In addition, BKS is the second largest retailer of college textbooks, with nearly 700 stores. Add in the Nook division, which recently signed a deal with Samsung, and you have a company with three different businesses that separately could well be worth over $2 billion.

Let's not forget that regardless of the advantages of online shopping, consumers still like the experience of going out and visiting stores. And a good book is something that customers apparently still seem willing to buy on the spot.

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