Whitney Tilson, T2 Partners, offers trading strategies and insight into the digital business of Barnes and Noble amid the company’s partnership with Microsoft.
all right, let’s get right to whitney tilson, managing partner at t-2 partners, who was ahead of the trade. he changed his barnes & noble position from short to long last tuesday and since then, the stock is up 62%. whitney, you had the benefit of today’s news to get that 69% gain in those shares, but what did you see last tuesday to make you change your bet on barnes & noble? yeah, we saw two things. number one, we saw one of the smartest value investors out there thate have tremendous respect for jana partners taking a 12% position in the stock and wow, that caught our position when we were short it that one of the best investors was putting a lot of money going long it. we had a lot of money on the short side and were think of covering anyway, but this really focused our attention. then we found a great write-up making the long case on a website that’s one of our favorites called value investors club, and laid out the case for sum of the parts where if you value the declining book store business, the stable college bookstore business and the nook business, you take those three pieces, that particular analysis came up with about a $37 combined sum of the parts valuation for it, and we said do we really want to be short this at 13 bucks? and then the clincher for us was, we noticed that if you add up len ridgeo’s stake in liberty and other insiders, there’s not much float left on this stock. then you look at the short interests, and we calculated that about 87% of this stock right now, of the float, is short, and that’s extremely dangerous on the long side — to be short, excuse me, something where that much of the float is short. it could set up the mother of all short squeezes, and i think we’re seeing some of that today. are you going to take the money and run or stick around? we think actually the market is underreacting, even if you fully dilute the share count with the liberty convert. multiplied by today’s share price, right now, you’re coming valuation. microsoft’s investment, which is only in the nook and the college bookstore business, so excluding the very highly cash flowing — it’s a declining business, but the existing bookstore business still generates a lot of cash and will for the next few years. so, the microsoft investment values just the other two pieces at $1.7 billion. yet the stock today is being billion. so, you know, we were anticipating premarket the stock was looking to be in the very high 20s. our consertive estimate of intrinsic value’s about 30 bucks. so, with the stock at $37 premarket, we were thinking it would be a good time to exit. but with the stock down here in the $22 range, we still think it’s very attractive. all right. you’re going to try to get more out of it. ? the question i had at the beginning of the show related to staying in barnes & noble, would be what is the presence of microsoft do now to accelerate future earnings and growth? earnings for barnes & noble have been lousy. yeah. look, it’s hard to know. i mean, prior to microsoft, though, one of the reasons we got interested in this, and i heard the earlier discussion about nokia and rim, so forth. those are two stocks we’re short because those are hardware device-makers that are rapidly losing market share and we think going to oblivion. but the nook is different. the nook has come out of nowhere, competing against amazon, who’s a ferocious competitor, and nook’s got 27% market share right now of the ebook market. so, in other words, it’s gaining market share, it’s got great new products. look at the reviews of the latest nook hardware that just came out with the backlit screen, et cetera. so, that’s what got us pretty excited. honestly, our short thesis from a year or two ago was the nook would get no traction, that amazon would crush them, but the opposite is happening. the nook is really doing very well. it’s a great product. so, that’s one of the key things that got us to turn around our position on this and sort of make a long bet here on barnes & noble, but particularly, the nook. and we think the deal with microsoft not only gives them a lot of cash — it’s $300 million up front, but also another $305 million of pretty much guaranteed payments over the next few years, and that gives them a lot of cash and liquidity to continue to invest in growing the nook business and not getting crushed and continuing, hopefully, to gain market share. whitney, just to be clear, high 20s would be your exit point at this point? yeah. i mean, we would — i think we would certainly start selling in the high 20s. i mean, we may need to sell some, just because look, the position’s up 65% sizewise, just to manage the position size. but just in terms of holding on a good-size position, you know, low 20s we still think is pretty attractive. high 20s was when we would start to exit. hard to know the price at which we would sell our last share. good to speak with you, as always, whitney. good to have you.
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