Don't believe the recent rally in Barnes & Noble Inc. (NYSE: BKS) stock - it's not going to stick.
In fact, this stock is ready to plunge.
The share price has been on a roller coaster ride all year. It climbed in February to over $18, fell to almost $8 in April, rose to around $21 in June, and then slipped to $10 in October.
Now it's on a tear again. It's moved up by 5% to 10% per day lately, soaring 65% in the past month.
But this move isn't based on strong fundamentals and good earnings. In fact, Barnes & Noble's business faces serious obstacles.
The book-retailing sector has been struggling with the growing popularity of eBooks. While Barnes & Noble has benefited from deep-pocket investors who have built a major stake in the company, the fundamentals aren't there to support this investment. It is extremely overleveraged, and the company has reached the stage where it's borrowing money to pay high dividends.
That is never a long-lasting business model.
The market agrees with this sentiment, building one of the largest short positions in a public stock.
You see, I believe the majority of Barnes & Noble's share price climb is due to shorts covering their positions. As of Oct. 14, 46.7% of the float was short.
Once this short cover period is over, I expect the stock to fall again, dipping even lower than before.
So it's time to sell Barnes & Noble Inc., before the stock rally collapses and all you're left with is a weak company in a struggling sector. (**)