Almost a year ago, I wrote about Overstock.com's (NASDAQ:OSTK) approaching IPO to repeat a Foolish message for investors: IPOs are financing events for a company and rarely opportunities for investors.
That led to an email spanking from the company's PR person -- an occupational hazard -- but I stand by the message. IPOs, with few exceptions, occur at two times. In a bull market, they rush out the door to take advantage of maximum investor enthusiasm (Danger, Will Robinson!). But when a company issues shares in a bear market to a certain lukewarm or cold reception, it means one thing only: maximum desperation for the company (Ditto, Will Robinson!).
No matter what the IPO timing, we almost always insist on a few quarters or, better yet, years of SEC reports to see how the company performs in the sunlight. That's why I wrote, "But if over the next several quarters, I see accelerating sales, costs that did not increase relatively, and stable or increasing gross margins, it might be that Overstock.com has some special sauce it's serving up against its universe of competitors..."
Overstock.com sallied forth on June 20, 2002, and recently, Fool community member trusoulja24 emailed me, pointed out that conditions had been met, and asked if I would write again.
You betcha.
Now, I'm a part-owner of the business
Overstock is not "just" an e-commerce site for inventory liquidations. The company not only buys excess inventory to sell itself, but also serves as a channel for others to do so. It buys and manages inventory supply, operates a business-to-business site to benefit small-business owners, and has opened an affordable goods department, too. (To be fair, my misunderstanding of this was at least part cause of the PR person's spanking.)
Based on rapidly rising revenues and improved margins, I purchased shares for a small percentage of the more speculative part of my portfolio last month. (as part of my portfolio allocation goals) While a year ago, the beauty of the business model escaped me, a few quarters of performance taught me otherwise. For a terrific analysis on that score, read educatedidiot's post on our Overstock.com discussion board (painless free trial required) and join in the exchange. Today I'll stick to management.
Quality at the top
While management quality is key for investing in any company, it's crucial for a contender in a Rule Breaking industry like Internet e-commerce. It takes visionary people to start and build new businesses, let alone those where the top folks must be gladiators to fight against an established order. Patrick Byrne is such a manager.
From Byrne's own gripping description of his battle with cancer to his Warren Buffett-esque Owner's Manual for shareholders, you will find a man with singular devotion to his business and commitment to the investors that own the company. For example, when he couldn't find venture capital, he invested his own money -- at a valuation 67% higher than he was offering to venture capitalists. Byrne acted in the best interests of public shareholders before the company was even public!
Sure, Byrne is the son of Jack Byrne, formerly of Geico and currently Chairman of White Mountain Insurance Group (NYSE:WTM), and a longtime friend of the current Geico owner, Berkshire Hathaway (NYSE:BRK.A) CEO Buffett. But plenty of sons neither learn anything from parents, nor strike out on their own to take big risks. This one did both.
What about Q1?
There's so much more to like. Byrne doesn't issue earnings guidance and even issued a release earlier this year shouting that analyst estimates were too optimistic. That honesty came in handy yesterday when, instead of the penny or so profit it forecast for Q1 ending March 31, the company lost $0.26 a share. Oops. Yet, this was Byrne's prepared statement:
"I am disappointed with these results. While we started off the quarter briskly, in the middle of the quarter we hit a patch of black ice. Following a record holiday season and profitable fourth quarter, the sizeable net loss this quarter is unsatisfactory and I apologize."
Are you rubbing your eyes?
He later said that he should have cut prices and acted more quickly when certain advertising became less effective. He implied that headcount was too high, and also noted the hit from the litigation settlement with Microsoft (NASDAQ:MSFT). (The settlement payment is confidential.) To address these problems, Byrne added that he will more closely align marketing programs with revenue, undertake the 10% workforce reduction postponed in January, and increase personalized marketing campaigns.
In the world of earnings releases, this is a revolution. Compare it to the meaningless blather often served up -- my favorite is a biotech drug maker's CEO statement that, "We look forward to reporting our corporate and clinical highlights throughout the year." Well, knock me over with a feather!
Corporate governance, minus and plus
Would I have liked a more complete balance sheet and any cash flow statement at all? Sure. I'll get it in the 10-Q. But my view is that a company should either release it all in the earnings announcement or issue a one-line, "Here's the 10-Q."
But shareholders did get something. Until today, Byrne was chairman, CEO and president of Overstock.com. This is common in newer companies where a visionary sets the course, but as a publicly held business grows, good corporate governance counsels at least some power sharing (as I wrote in "Take This Stock, Please!") This morning, the company announced that company co-founder and CFO Jason Lindsay will add the president's mantle. Pretty good for a 32-year-old. (Oh, my achin' bones!)
I'm test-driving Overstock. While not happy about Q1, I'm interested in the long-term health of the business. Byrne's straightforward discussion of the problems and the rare CEO's willingness to take responsibility show that the business has a great doctor. Unlike every other CEO on the planet, it seems, Byrne didn't blame things on the war in Iraq or the position of the planets. He identified specific causes and promised specific actions.
It's too bad that's considered revolutionary today, especially when it's just the ticket to attract investors.
The short and long of it
In our December 2002 issue of The Motley Fool Select, I laid out the investment thesis for shorting defense contractor and communications company ViaSat (NASDAQ:VSAT). Last Friday, we published Dueling Fools: A Defense Turnaround? about ViaSat -- after a Foolish reader and I worked on it for a few weeks. This morning, the company cut its outlook for Q4 ending March 31 to breakeven, and it will report fully on May 22.
Yet curiously, the stock plummeted on Friday, a business day before the company's announcement and before our publication. S.G. Cowen had issued a note to clients a few weeks before bringing their earnings number for Q4 down to six cents a share. I confirmed with Rich Valera at Needham & Co. that his firm issued "something internally to the sales force" at 1:00 pm Friday afternoon to the effect that their prior eight cent number was at risk. I have a call in to ViaSat asking if the Monday publication of the warning had anything to do with possible Regulation FD concerns. I'll let you know what they say.
On the long side, last month I became a part owner of Rule Breaker XM Satellite Radio (NASDAQ:XMSR), also along with Overstock for the speculative part of my portfolio. Do you use the service? For a future column, I'd appreciate knowing your experience. Please post on our XM discussion board. For confidential communications, please email me at [email protected].
Intuit, out of it
Finally, I hope you have the opportunity to read my turn-of-the-year series on the steps I began in 2002 to improve my portfolio's performance and implement lessons about valuation and financial statement analysis. These four columns are author's favorites on my bio/archive page. A Plan of Attack warned about the potential problem when accounts receivable grow faster than sales with no obvious business reason.
The example was Intuit (NASDAQ:INTU), with a 6% decline in sequential sales against a 118% balloon in accounts receivable, and a 32% increase in year-over-year sales versus a 184% explosion in accounts receivable. About two months later, after market close on March 20, Intuit warned for Q3. Its stock crashed 24% the next day and 32% to yesterday's close. I'm not claiming anything special here -- only that if you pay attention to a few bright red flags, you can easily spot potential problems in companies you own or are considering buying.
With that, I wish you a most Foolish week!
Curious about how asset allocation can help you plan financially? Join our upcoming online seminar with fave Foolish writers Robert Brokamp, Mathew Emmert, Tom Jacobs, and Jeff Fischer!
Tom Jacobs (TMF Tom9) would like to sell his household clutter, but can't find the right website. He owns shares of Overstock.com and XM Satellite Radio and is short ViaSat, as his profile reveals. Enjoy stock ideas you won't find anywhere else each month in The Motley Fool Select ! Motley Fool writers are investors writing for investors .
