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Why Stock Jumped 15% at the Open Today

By Reuben Gregg Brewer – Oct 29, 2020 at 11:09AM

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Investors were excited by the online retailer's earnings release. Here's a quick look at what it contained.

What happened

Shares of online retailer (OSTK 1.80%) rose in dramatic fashion as trading began on Oct. 29, quickly reaching a gain of roughly 15%. That didn't hold for long, however, with the stock giving back almost all of that gain by 10 a.m. EDT, when it was sitting at a roughly 2% advance. 

So what

The big news driving the early enthusiasm here was Overstock's third-quarter earnings release. The reading was, indeed, pretty good. For example, revenue increased 111% year over year in the quarter. Earnings came in at $0.50 per share compared with a loss of $0.89 in the year-ago period. The company beat Wall Street expectations on both fronts, too, which helps to further explain the big stock price gain.   

A man looking at a red line jaggedly rising

Image source: Getty Images.

That said, the company attributes most of the performance improvement to the impact of the COVID-19 pandemic, which has materially increased demand for home furnishings. However, that demand has also led to disruptions in the company's supply chain, as it has struggled to keep up with demand. Overstock must tread a fine line here, as too much investment could result in overcapacity if the COVID-19 bump proves temporary. Moreover, with the stock up over 930% so far in 2020, there is a lot of good news priced in here. So much good news, in fact, that the company issued shares during the third quarter to take advantage of the market's enthusiasm. Cooler heads looking at the big picture probably helped pare those early gains, since there are, to reverse an old saying, some clear dark clouds on Overstock's silver lining.  

Now what

There's no doubt that is doing exceptionally well right now. However, a material part of that performance is being driven by a demand spike related to the pandemic, which could turn out to be a one-time event once the world has a handle on the novel illness. With the stock up so much this year, suggesting that Wall Street's expectations are very high, long-term investors should probably take a cautious approach here. 

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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