Saturday, December 24, 2005

Overstink: Overstock

Shares of Overstock (OSTK) are down 8% since we told readers to dump shares less than 10 days ago.

Actually, we've been short OSTK for months, but it wasn't until one week ago that we warned investors that OSTK was going to fail miserably starting in 2006:

"...CEO Pat Byrne has spent the majority of 2005 in a catatonic state of corporate paranoia. He claims that there is a "conspiracy" against him and his company, an online retailer/liquidator mired in operational woes. Byrne first aired his views in a now infamous conference call that mentioned cocaine, gay bathhouses, dead bodies in the trunk, and cell phone calls redirected to Mexico. When he's not driving his company into the ground, he likes to jump on internet message boards, where he spews farfetched narratives that are better left for Hollywood, not Wall Street.

...managerial eccentricity and oddball behavior should raise red flags. Pat Byrne seems to be better at scapegoating externalities and dressing his company's shortcomings in convoluted tropes and pop culture innuendo (he says the short sellers are following a mastermind "Sith Lord," a reference to the sci-fi epic, Star Wars) than he is at addressing Overstock's financial health, or lack thereof. In just four quarters, Overstock has burned through more than $90 million dollars. Meanwhile, shopper acquisition costs continue to rise; Overstock is hemorrhaging cash.

The writing is on the wall: Overstock's problem isn't rampant short selling -- it's mismanagement. Everything from implementation problems to bloated marketing expenses points to management's inefficacy. And that's just the tip of the iceberg. OSTK's receivables turnover ratio leaves much to be desired -- its ratio is lower than its peers, meaning Overstock's collection policy needs some fine-tuning. Even though Overstock's revenues are climbing (but margins off their 2002 high), we are reiterating our sell rating on shares of Overstock."
Since then, more negative Overstock news has surfaced, namely, that Overstock's supply lines are weakening and they're generating little to no repeat business. There's even talk that Overstock will announce a major write-off in January.

Some are comparing to a young Amazon (AMZN), which we deem utterly puerile. Amazon, in it's hypergrowth phase, was led by an astute businessman. Byrne is no manager, although he's one hell of a raconteur. Our feeling is that OSTK will either plummet to the teens in early 2006 or be sold to a company that can liberate Byrne and his cohorts from five more years of misery.

Later today, the Wall Street Journal will publish a story on Rocker Partners, one of the firms that's betting Overstock 's share price will continue to drop. Expect to see OSTK shares take yet another whacking on Tuesday, which is when institutional traders return to work.

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