The house rules are simple in this weekly column.

I bash a stock that I think is heading 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).

You can judge a bookstore by its cover
The closure of Borders wasn't an opportunity for Barnes & Noble; it was a vision of the future.

The lone superstore chain standing isn't taking advantage of having fewer competitors around these days. The stock tanked this morning after the beleaguered retailer posted disappointing quarterly results.

Revenue slipped 0.4% to $1.9 billion, just short of the minor uptick that analysts were expecting. A 3% decline at the retail level and flat college bookstore sales aren't surprises. However, a mere 5.6% increase for the Nook workhorse and a dip in online sales at are baffling.

Maybe the company thought it could appease investors by pointing out that Nook unit sales doubled during the four-day Black Friday weekend, but the market's smarter than that. The key word there is "unit" sales, and everyone knows how prices on e-readers and tablets have dropped to margin-crushing levels over the past year.

Investors got excited earlier this year when Microsoft (NASDAQ:MSFT) was willing to invest $300 million for a 17.6% stake in Barnes & Noble's college bookstore and Nook business, but this is shaping up to be yet another lousy bet on Mr. Softy's behalf.

Physical books are fading in popularity. College bookstores are going digital. Barnes & Noble's Nook may have seemed like a strong driver when it was introduced a couple of years ago, but it's accounting for just 8.5% of the company's total revenue these days. That's not enough for a subsidiary that will forever be challenged to turn a profit in this competitive landscape.

We know how this book ends, and it's not pretty.

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.

  • (NASDAQ:AMZN): It may seem fairly obvious, but Amazon is eating Barnes & Noble's lunch. Forget this most recent ugly quarter. Turning our attention to the critical holiday shopping season, analysts see Amazon's net sales climbing 28% while targeting flattish top-line growth at Barnes & Noble. Yes, Amazon's margins are being squeezed, but the leading e-tailer still has more wiggle room in expanding its growing line of Nook-bashing Kindle products -- and less to lose as media distribution goes digital.
  • Target (NYSE:TGT): Barnes & Noble singles out Target in this morning's press release as a strong promoter of its Nook during the quarter. It's easy to see why. Target stopped stocking Kindles earlier this year in a tactic to keep Amazon -- its former online partner -- at bay. However, Target has bricks-and-mortar advantages that Barnes & Noble does not. The discount department store operator has been able to keep its stores busy by stocking "cheap-chic" fashions and turning to fashion icons and interior designer legends to stock Target with exclusive merchandise.
  • Apple (NASDAQ:AAPL): As Amazon destroys Barnes & Noble on the low end, Apple is arming consumers with the smartphones to make comparison shopping easier and the iPads to consume digital books and magazines. Picking up Apple now -- under $600 and for less than 12 times this new fiscal year's projected earnings -- is a steal no matter how you feel about Barnes & Noble.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.