Buyer Beware on Borders

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Borders (NYSE: BGP  ) shares surged after major shareholder Bill Ackman made a few upbeat comments about the beleaguered bookseller. But to eager buyers of the stock, I say caveat emptor.

Ackman, the founder and CEO of hedge fund Pershing Square Capital Management, said he thinks bankruptcy is a "low-probability event" for Borders. He did suggest that the company's future could include industry consolidation, mentioning the possibility of combining Barnes & Noble (NYSE: BKS  ) and Borders someday.

However, bear in mind that Ackman owns 18% of the bookseller; what else would he say about the company's potential for bankruptcy? "I plan to go down on this sinking ship?" Sure, his stubborn perseverance implies that he believes in the company's revival, but that doesn't mean the company will survive. Meanwhile, Pershing Square has been lending Borders money at beneficial terms (for Pershing Square, that is), making its involvement essential to Borders' continued existence.

Borders recently reported dismal holiday numbers, lost its CEO, and is cutting costs by laying off workers at its corporate offices. As for all that money it's been lent, Borders must repay $42.5 million to Pershing Square on April 1.

Even if Borders weren't in such precarious financial condition, beset by lagging sales and a high debt load, it faces major competition from (Nasdaq: AMZN  ) and discount retailers such as Wal-Mart Stores (NYSE: WMT  ) , Target (NYSE: TGT  ) , and Costco (Nasdaq: COST  ) , all of which participate in the vital best-seller portion of the bookselling world. In addition, its dead-tree business could face a serious disruption from the growing popularity of e-books.

I understand that the support of smart individuals like Ackman can provide bullish reinforcement for an investment thesis. But Foolish investors should apply a critical eye to anything anyone says; nobody's right all the time. And while Ackman's known for his successful past agitation at MBIA (NYSE: MBI  ) and Wendy's/Arby's, he's not perfect. Look no further than his involvement with Target; he lost nearly $2 billion for his investors, and waged what many considered a misguided proxy war against the retailer's management. Some critics opine that he may have a difficult time admitting when he's wrong.

I suppose that a Borders survival scenario isn't impossible. After all, I predicted its departure from the retail scene way back in October 2008, and that hasn't come to pass yet. Still, investors shouldn't invest hoping for miraculous outcomes. There are far better, more prudent stock ideas than Borders to choose from, even if Ackman's convinced that the bookseller's worst-case scenario won't come to pass.

Costco and Wal-Mart are Motley Fool Inside Value picks. and Costco are Stock Advisor selections. The Fool owns shares of Costco. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

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