Overstock.com (NASDAQ:OSTK) finally went down! After a month-long run-up, the stock dropped 13% to $30.19 yesterday and another 5% to $28.68 this morning. Has the Overstock bubble finally burst?
Hold on. Just a few weeks ago, after a rally to $27.69, we were discussing whether or not Overstock was still undervalued. We suggested that the price discrepancy between Overstock and rival online retailer Amazon.com (NASDAQ:AMZN) indicated that Overstock might have some room to run. Today, the price is pretty much the same, so why is the conversation so different?
I mean, did the Overstock bubble really burst? Was there even a bubble at all? Does it matter?
The answers: maybe, maybe, and it depends. Over the past few weeks, the stock jumped to $35 and back, yet nothing changed. Overstock's underlying business has neither improved nor deteriorated. And, unless you thought the stock was wildly overvalued at $35, the action the past few weeks is absolutely inconsequential -- at least, to the Foolish long-term, buy-and-hold investor.
It's funny that we ask more questions when the bottom "falls out" than we do on the way up. But here's the thing: Unless you intend to sell, it still doesn't matter whether Overstock goes to $40 tomorrow or drops back below $20 first. As an Overstock shareholder, the determinations that need to be made at this point are fourfold:
1. Is Overstock a company you want to own?
2. Do you believe the stock will be worth a whole lot more five to 10 years from now?
3. Does your expectation for outperformance outweigh the risk of failure?
4. How much of your portfolio are you willing to bet on it?
Anyone who believes that Overstock is undervalued, but also believes that the stock has become too big a part of his or her portfolio, should lighten up. If you think the stock is way overvalued, or you're wondering why you even bought the stock in the first place, then you might just sell it all.
Personally, I think it's possible that Overstock is still undervalued. However, I have difficulty making an argument for buying without a greater margin of safety, especially given how difficult it is to determine how much a young, marginally profitable company is really worth.
As for selling, that's a personal decision, and one that's always difficult to argue against. That said, and though I may feel differently at $40, I am inclined to hold on to my shares for now.
Overstock was an early recommendation in Motley Fool Hidden Gems . Take a free trial with just one click .
Fool contributor Jeff Hwang reads Hidden Gems every month and owns shares of Overstock.com.
