Barnes & Noble: Over-Sold Descending Wedge Trade

Barnes & Noble (BKS) has flagged a buy from my Directional Discretionary Technical System today. BKS has been in a long term trading range, hovering between the $20 dollar over-head resistance level, and the $10 mainline support. Before we analyze the chart, lets look at some fundamental valuation of the company. I'm looking to long BKS from $12.25  to $13.05-$13.10 for a trade only. Would be 75% equity holding 25% (100 September call options) strike price $13.

Fundamentals

• Peg Ratio of .8 (extremely low) indicates that the price of BKS stock is undervalued.
• Debt to Capital Ratio of 25.78%, this is good it shows BKS is not significantly over-leveraged, the industry norm is 35-40%.
• 56% of the stock is held by institutions and insiders.
• 34.57% of the stock is short (high short interest).

BKS earnings 2012 beat the street consensus of a .98 loss with a .78 cent loss, due to increasing sales of Kindle Fire product, which is a strong real competitor with the apple when it comes to tablet reading. This is also a positive indication for a potential turn around of BKS sub-par profit and revenue numbers in recent years. EPS growth is 21% which is within industry norms but very good for a company as large as BKS.

 

Total revenue has increased from 5 billion in 2009 to 7.4 billion to first quarter 2012, that's a 2.4 billion dollar increase in revenue due to over 7 million kindles being sold in the last 3 years...and its only gaining stronger momentum in the electronic retail sector of tech spending trend in the retail world. ROE, ROA, ROI are substantially below industry averages but this is due to the BKS being the market leader and largest player by far in brick and mortar book retail.

Technical's, Price Action

BKS stock has bounced off the $10-$11 dollar mainline support level three times this year. Even on heavy volume down days, BKS failed to penetrate this support level, confirming this to be a non-catalyst/event driven bottom. Currently in the past 3 months BKS has been in a Falling Descending Wedge pattern, which is a short term bullish reversal pattern, which is ranked 11 out of 19 (Bulkowski Chart Patterns), the pattern has a 65% chance of rising and a average gain of 26%. Contraction of volume is here at the beginning of the wedge as well, which only furthers the reliability of the pattern.

BKS has a positive MACD divergence signal, this is an extremely reliable indication a short term bounce is in order, also the MACD signal line crossed today showing positive momentum is due extremely soon. Also slow stochastic momentum crossed the 20 oversold level signal threshold level, also indicating BKS to be in a over-sold state due for a bounce.

My specially designed Double Smoothed 5EMA True Strength Index Double Cross-Over System has also indicated BKS to be vastly over-sold, a buy signal occurred today, and BKS is well on its way to reaching the -.25 over-sold signal line as well.

Overall with the series of low discounted fundamentals, over-sold technical's and 34% short interest, BKS is due for a quick move to the low to mid 13's in the coming two weeks, i would recommend BKS stock as a short term momentum play, due to some short covering (squeeze)action.