BAMM -- Final Thoughts

Based on the last 3 posts, its pretty obvious that I am not planning to buy shares at this point. Just to recap ....... management is unloading shares, the valuation does not look particularly cheap, YoY growth is due to one time gains, SSS are negative, the industry is in a secular decline.

So why not short, management is after all unloading shares into up moves in case that point was not made obvious already?

The main reason I am not getting a short ticket ready is that I don’t want to bet against management at valuations that are no longer in the ridiculous category. It looks like management is making incremental improvements in operations every quarter and are not wasting their cash – that’s usually not a recipe for good short trades.

If the company can continue to improve operations over the next few years this stock can do very well despite the problems with the industry. For example, despite the recent improvement BAMM is still behind Borders (BGP) from an inventory turns perspective. If BAMM can get to BGP’s level of efficiency, the business can throw off somewhere between $100M - $150M in free cash over the next 2-3 years, if they can get half way there they can dislodge $50 - $75M in cold hard cash. This is a huge windfall for a stock with market value of $277M.

The problem is that I don’t know if the low hanging fruit has been picked or if there are still more easy improvements to be made. A secondary concern is the Harry Potter release, who knows how much hysteria this will generate.

What am I looking for to make a trade? For a long position, I am looking for continued operating improvements, lack of insider sales, falling stock price (at roughly $12 the stock would trade at roughly half the valuation of the broad market), positive SSS. To make a short trade I am looking for the opposite to happen.

Overall, my sense is that this stock is trading at a valuation that is a premium for a declining business because management has gained some credibility and effects of Harry Potter are being discounted by the market.