The house rules are simple in this weekly column:

  • I bash a stock that I think will head lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Barnes & Noble (NYSE: BKS).

Almost done with the tenth chapter
The country's leading book superstore is feeling awfully frayed these days. B&N hit a fresh 52-week low yesterday. The stock has shed nearly 40% of its value since I dissed the shares in this column a year ago, but the markdowns are only beginning.

A lot has happened since last year -- none of it is good. B&N was set to introduce the Nook then. Now the e-book reader is out, and apparently, it's not much of a game-changer, despite last month's margin-crimping price cut.  

Sentiment and momentum are also turning southward. I defied the trend last October, slamming the retailer even though it had beaten Wall Street expectations in each of the three previous quarters. Now analysts are overestimating the chain's prospects, after B&N posted a wider loss than expected in its latest quarter.

Store comps fell nearly 5% in fiscal 2010, yet the retailer somehow predicts positive store-level metrics during the new fiscal year. Really? Dead-tree bound books are suddenly a growth industry?

B&N's online business is growing briskly on the strength of website sales and its e-book initiatives, but the $573 million in revenue it delivered on that front in fiscal 2010 is just shy of 10% of its overall revenue mix. It's also hard to imagine B&N turning a profit on its Nook and digital endeavors. The midrange of the bookseller's guidance for fiscal 2011 is, sadly, a deficit.

We've seen this before. Bricks-and-mortar media retailers falter all the time. With record stores nearly dead, and DVD rental chains dying, bookstores are inevitably the next niche to meet the meat grinder.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

Green Mountain Coffee (Nasdaq: GMCR)
Freshly brewed java is one of the signature scents of the book superstores. Folks apparently love drinking coffee as they turn the pages on a potential purchase. What will happen as portable readers become more popular, and homes become the new bookstores?

Well, premium coffee brewed at home in single-cup portions seem like a compelling alternative. Thanks to its Keurig brewers and K-Cup refills, Green Mountain's revenue and earnings soared 68% and 90%, respectively, in its latest quarter. Green Mountain thrived during the recession at the expense of Starbucks (Nasdaq: SBUX), as the value and convenience of Keurig appliances won over consumers. However, now that both Green Mountain and Starbucks are percolating once again, it seems that the economic downturn simply expanded the market of java-sippers.   

Apple (Nasdaq: AAPL)
B&N doesn't have the financial muscle to match e-reader and dot-com leader Amazon.com (Nasdaq: AMZN), but even the mighty Amazon is feeling susceptible to Apple's attacks. Amazon apparently took three years to top 3 million Kindles sold. Apple's beaten that figure with iPads in just three months.

I say "apparently" because Amazon has never gone public with its total e-reader sales. Apple, on the hand, keeps selling a million iPads with every passing month. The Cupertino champion has naturally sold even more iPhones and iPod touch gadgets than iPads, transforming Apple's iOS into the platform of choice for e-reader applications. Apple was the top dog in music's digital migration. It's likely to be the market leader -- with some healthy competition from Amazon -- in digital books. 

Google (Nasdaq: GOOG)
Google is the renegade in digital reads. It upset publishers when it began scanning books five years ago; rival Yahoo! (Nasdaq: YHOO) instead chose to approach libraries to digitally translate only works that were in the public domain, or ones that had an author's consent. However, now that Google is the undisputed global leader in search -- and with its Android platform creeping into smartphones and eventually tablets, to position itself as the only legitimate challenger to Apple's iOS -- it's carrying more weight in the e-book realm. Despite their sizzle, Google shares now fetch just 16 times this year's projected profitability, and only 14 times next year's target. That's a compelling value for a dot-com darling that isn't going away.

I'm sorry, B&N. I hope you have time to write a happier ending for your story than the one I'm reading.