Tuesday, June 12, 2012

Overstock.com Oversold?

Shares of Overstock.com (OSTK) are held by value investor extraordinaires Prem Watsa and Francis Chou. But the stock has languished as of late, having lost 2/3's of its value since 2010 and half of its value over the last year. As a result, you have a chance to get in on this stock at better prices than have these wise gentlemen.

At a market cap of $160 million, Overstock trades for just 15% of sales. But if you subtract the company's relatively large net cash position from the market cap, Overstock trades for just 10% of sales! Yet the company operates in an industry (online retail) that is expected to continue to grow.

And grow this company has; sales have increased from $92 million in 2002 to over $1 billion today. Even more impressively, Overstock has managed to do this while barely growing assets! Assets are lower now than they were eight years ago! The firm has managed to do this by migrating towards a model whereby Overstock sells the goods to consumers, but the orders are fulfilled by "partners". As such, Overstock doesn't need a ton of warehouses and employees and doesn't even touch the inventory (save for returns) for goods that are sold via this method.

Recently, however, revenue has stagnated. Part of this (though probably much less than 10%) can be blamed on a Google initiative that penalized Overstock's search results. This issue was corrected last year, however, and sales are still stagnant.

But of course the major problem is that the company has hard a time sustaining profits. High litigation expenses hurt results last year, but as those have come down, profits have increased. Furthermore, the company recently rationalized its work force, which helped swing its most recent quarter from a loss last year to a profit. Though still slightly negative, revenue trends have picked up significantly, with the CEO proclaiming on the company's latest conference call that "I think that you will see revenue accelerating this quarter."

But profits aren't the only problem. Overstock has had to undergo numerous financial restatements (described here), and is still involved in a great deal of litigation. (It took me a long time to read through the company's legal issues, and not because I read slowly!)

The company's CEO (who goes by the title "Doctor" at company presentations as a result of his PhD in philosophy, from what I gather) seems rather eccentric, which may be getting him and/or the company into hot water at times. There is a special section of Overstocks' investor website where the doctor speaks out, acknowledging that he is often in the news due to his attempts to "curtail injustice". There, he details his crusades against major brokerage houses, a hedge fund, and naked short-sellers (among other things).

Obviously, some heavy hitters in the value investing community believe in this company. Do you?

For more on this company, check out the bull case made by portfolio manager Glenn Surowiec on Great Investors TV.

Interested in another opinion on Overstock, or any other stock for that matter? One of this site's sponsors has offered our readers a free analysis of a stock of their choosing here.

Disclosure: No position


ChasingBruce said...

I looked at OSTK briefly a while back.... http://www.chasingbrucegreenwald.com/2012/01/25/ostk-worth-a-ride-on-coat-tails/

it is worth noting that the CEO's father John Byrne is the former CEO of GEICO and a Warren Buffett confidante… Additionally, he formerly ran the Fireman’s Fund – once a unit of American Express – which later evolved into White Mountains Insurance Group. He understands value investing, capital allocation, and share holder rights to say the least.

Anonymous said...

Read 'Selling America Short' chapter 8 before you consider buying Overstock.