Overstock.com Will Burn Your Portfolio

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A week or so ago, I saw Overstock.com (Nasdaq: OSTK  ) was trading in the high $20s. So I went and "shorted" it in Motley Fool CAPS, our community intelligence database, for a rather quick points gain (26 points as of this writing).

Why so bearish? Look back over the last five years and Overstock.com just hasn't been profitable, not even in the crazy, go-go, consumer feeding frenzy days, and the current economic conditions are quite different. It doesn't look like Overstock's expected to be profitable for the next year or two, either.

Meanwhile, the company's management has become distracted, even downright obsessed, with a crusade against naked short selling. Regardless of how you feel about that hot-button issue, distracted management is dangerous when it comes to investing.

Go for the gold
Granted, Overstock.com is less unprofitable now than it was, say, at the end of 2006, when its annual net loss clocked in at a massive $4.68 per share. Still, over the last 12 months, it's lost $0.86 per share. Sheesh, it reminds me of long-standing, now merged unprofitable whiz kids Sirius XM (Nasdaq: SIRI  ) . Sure, sometimes investors do invest in unprofitable companies with great promise, and for great results. Over time, though, "less unprofitable than it was before" is about the time when investors start to realize maybe they bet on the wrong pony.

When it comes to e-commerce, why not just invest in a gold standard company like Amazon.com (Nasdaq: AMZN  ) . Many people might argue that Amazon is a pricey stock, but at least it's profitable, popular, and constantly innovating. I'm not as crazy about eBay (Nasdaq: EBAY  ) , which seems to show signs of being a "mature" e-commerce company, but it still has some interesting side businesses that show impressive growth, like PayPal.  Since Amazon and eBay are also discounters, what's Overstock got to offer?

Meanwhile, Overstock's sensitive to slow consumer spending and high energy prices (and it also uses free or low-priced shipping to entice online shoppers). And where's the plan for other high-growth, high-margin areas, like digital content? It looks like it hasn't quite got around to that yet. I see CDs, DVDs, and physical books for sale on its site. Even Borders (NYSE: BGP  ) has gotten into downloadable digital content, recently saying it offers 15,000 audiobooks, with 5,000 of them available in MP3 format.

No "yippee-ki-yay" for shareholders
One of Overstock's major differentiators from its rivals may be its leader's need to get a grip and move on from some major distractions. CEO Patrick Byrne's crusade -- which often diverged into what seemed like a crazy crusade, given talk of "Sith Lords" and such -- has been going on for years now.

"Naked short selling," which is illegal, has hit the mainstream radar these days, given the SEC's move to block the practice in selected financial stocks like Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) , but heck, if you were an Overstock shareholder you've been afraid of the naked shorts for ages. Overstock was once a Motley Fool Rule Breakers pick, but given management's distractions, David Gardner and the Rule Breakers team decided to sell it in February 2006. Indeed, sometimes it might be tempting to think Overstock's more about curtailing naked short selling than online shopping. If there's a business strategy here, it's lost on me.

Many, many of the press releases featured in Overstock.com's Investor Relations section of its website relate not to its business, but to Regulation SHO and legal wranglings. Oh yeah, there was an SEC investigation, too; Dr. Byrne's response to the agency's decision not to recommend enforcement action? "Yippee-ki-yay."

Be afraid, be very afraid
Overstock.com has a lowly one-star rating in our Motley Fool CAPS database as it is, so it's obvious that many people in our investment community similarly feel that Overstock is one scary stock.

Do you agree think investors should beware Overstock? Or are you the kind of contrarian who thinks Overstock's actually poised to do very well, despite historical issues like profitability and management distraction? If you're on the "investor, beware" side of the fence, just go to Motley Fool CAPS and mark Overstock "underperform."

Next week we'll reveal which stock got the prize for the one most likely to burn investors' portfolios. For now, let's just contemplate whether that "O" stands for "oh, no," at least where investors are concerned.

eBay and Amazon.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2008, at 2:09 PM, DarthWader wrote:

    I agree with you, I buy online quite a bit, but I don't even check the Overstock site for things that I want/need. OSTK is a dog with fleas.

  • Report this Comment On July 30, 2008, at 2:30 PM, mozwolf wrote:

    Lots of companies start out as "not as unprofitable as they were before" Case in point was Amazon. After the dot.com bust it was widely critized for shrinking unprofits. But now it's fantastic. Same could be said about Sirius XM although that obviously remains to be seen. I'm certianly not going to recommend Overstocks, but there's more to a story that that.

  • Report this Comment On July 30, 2008, at 2:41 PM, SamEAntar wrote:

    Suggested correction to headline:

    Overstock.com Will Byrne Your Portfolio

    Kindest regards,

    Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

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