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Don't Judge Borders By Its Cover


...with a float of about 59 mln shares, the short interest in Borders has grown to about 12 mln shares or roughly 20%.

"What'll you do when you get lonely
And nobody's waiting by your side?
You've been running and hiding much too long
You know it's just your foolish pride..."
-Layla (Eric Clapton and Jim Gordon)

If I were to rank my five favorite songs of all time, Layla would easily be in that mix.

But what girl could have inspired such an incredible song? As it turns out, not only was Pattie Boyd the woman behind Layla, she was also said to be the inspiration for Wonderful Tonight, Bell Bottom Blues and the song that Frank Sinatra himself said "was one of the best love songs ever written", Something. Paris and Lindsay, eat your heart out.

Well, this week you can "read all about it" as Wonderful Today: The Autobiography of Pattie Boyd, will be available at a book store near you!

Yes, bookstore. Some of us still forego (AMZN) to actually get in our cars and drive out to our local Barnes & Noble (BKS) or Borders (BGP). And that gets me thinking - are there any trades in the stone and mortar book store space?

Borders, according to its website, "is a leading global retailer of books, music, movies, and gift and stationery items". Now, the stock has been anything but reflective of such leadership. Trading down from $23 or so in May before bottoming out at $13.72 earlier this month, owning Borders over the last few months had you pulling out your copy of Nausea, by Jean-Paul Sartre, just to lighten your mood.

Now back in May there seemed to be reason for optimism. Takeover speculation was running rampant, and a May 22 Barron's Inside Scoop column only added fuel to the fire.

Back in May, Barron's pointed out that a recent SEC filing revealed that Glenview Capital Management accumulated a 5.69% share in Borders since the start of the 2Q and that, along with Glenview's other prominent hedge funds, also had large stakes in the company, with Dreman Value Management's 12.8% stake, Pershing Square's 11.6% stake and Citadel's 6.2% stake leading the way.

Well, earnings a week or so later were a disaster and the stock dropped faster than a sinker from the Yankees' Chien-Ming Wang. A Goldman Sachs downgrade a few days later didn't do a lot to help either.

So why my reasons for optimism? It looks like any buyout premium that was previously in the stock is long gone. And although the hedge funds that were mentioned earlier may still own their positions, short sellers have ruled the day. As a matter of fact, with a float of about 59 mln shares, the short interest in Borders has grown to about 12 mln shares or roughly 20%. As a comparison, Barnes & Noble has a short interest of about 5%.

Significant? Not particularly for the long term investor, as at the end of the day fundamentals typically trump everything else. However, for a trade, Borders is becoming rather compelling as things appear to be overdone on the downside.

Borders is due to report its 2Q earnings tomorrow after the bell. The Street is looking for a loss of $0.33 on about $918.57 mln. I am not foolish enough to try and guess what Borders will report. However, in my opinion, a miss is pretty much priced into the stock and any upside surprise could have shorts scurrying for cover, especially as we get closer to the Labor Day holiday.

I am by no means painting a rosy long-term picture for Borders, but the Pattie Boyd book will get me up off my rear end and into one of its stores. No small feat, as the last time a book has got me this excited was Hockey Stars of 1974 by Stan Fischler!

Maybe while I'm there I will pick up some René Descartes just to keep things honest.
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