One Guy's Investments: Huh? What? (OSTK)

Okay, I officially have no idea what's going on with Overstock (OSTK).

I bought most of my shares of Overstock at the height of it's growth, unfortunately, back in January, and I'm carrying an average cost of over $50 a share ... so I'm delighted at the 25% jump up in the last couple days. A little more of this and I'll be back in the green.

But I definitely don't understand it.

Overstock (OSTK), for those who may be living on the Moon and haven't yet heard, is a closeout online retailer (the "Big O" TV ads are out in force again) whose founder and CEO is, to say the least, charismatic. Patrick Byrne has been accused of being crazy, insane, irresponsible, and ignorant of the ways of Wall Street. None of those accusations seem fair.

Overstock has become a very popular shopping site, and they continue to have huge growth in sales (if not profits) ... but there are a few significant issues that have come up over the past six months.

1, Byrne and Overstock filed a lawsuit against a bunch of hedge fund traders and researchers claiming conspiracy and all kinds of other stuff.

2, They have also been spending a lot of time and energy talking about "naked shorting", which is an illegal practice where by shares are "borrowed", shorted, and sold without the shares actually having been located for borrowing. The result is a "failure to deliver" list of the companies whose stocks have been shorted without short-able stocks having been found for loan. While it is illegal, there aren't teeth in the law and Overstock, which is almost always on that list these days, is angry.

3, Operationally, Overstock had some major snafu's with their IT changeover to a new system. According to Byrne they bit off more than they could chew and were unable to both upgrade their systems and load new inventory into their marketplace, which meant their numbers were awful at their last earnings release.

4, Looking forward, there is great news in that Jack Byrne, Patrick's Father and a Warren Buffett friend and the CEO who took GEICO to the heights it now enjoys, is now chairman of the board. That tells me that Patrick has realized he needs help refocusing on operational excellence in Overstock's core business.

This has been covered to death in the financial media all summer, but I am particularly partial to the Motley Fool coverage -- I think they've been fair, and they've tried to actually explain what's going on rather than just reporting the sense of the street. Article from them about the bad quarter here., about the company's profitability or lack thereof here, and on Patrick Byrne's lawsuit shenanigans here and here. They also ran a good series of questions for and answers from Byrne himself, which are a must-read for any long-term OSTK holder -- after all, in the eyes of the Street, Byrne IS Overstock.

But what does that have to do with the last few days?

I am personally feeling much better about Overstock than I was a few months ago -- it seems that the lawsuit is being handled in court as it should be, though Patrick Byrne continues to issue press releases such as this one, reminding people of the naked shorting problems.

And I believe Jack Byrne will help the company to refocus.

And I hope that their new systems are ready for a very busy holiday season, because I'm looking forward to Overstock capitalizing on it's growing brand name and great inventory to see some really significant sales growth during this Xmas season.

But none of that is a reason why the stock would shoot up by 25% in a couple days, with really no particular catalyst. Although Overstock did very well and had a similarly great move in the prime shopping season last year, I think it's a bit early for that since we've heard no such great news about traffic or sales yet.

So I'm left to assume that this is a short squeeze -- Patrick Byrne and his family and friends still own the lion's share of Overstock (more than 80%), so if they really are calling in all of their stock certificates from their brokers and making them unavailable for shorts to borrow, I expect that both legitimate and illegitimate shorts are going to get their shares called. When the shorts comprise 65% of the float and the float itself is so small, I guess it doesn't take much to really throw the shares into an uproar ... especially if the trend turns against the shorts.

I'm no expert on shorting -- I wouldn't do it myself, not because I believe it's unethical (legal shorting, that is) but because I don't like the limited potential for gains (a stock can't go lower than $0) and the unlimited potential for losses (with long investing, at least you can't lose more than you invest). If I really believed a company was going to fall, I'd buy puts instead of shorting the shares ... but for the most part, I prefer to spend my time on optimism and buying.

So does anyone else know what's going on with Overstock?

Beats me, but if they can figure out this lawsuit without it taking too much more attention away from the company's leadership, I still like the business, and I really like Jack Byrne and the growth of online Christmas shopping ... here's hoping there's good reason for this week's ascent in OSTK.

Labels: OSTK