When WR Hambrecht's Bill Dreher raised his price target for the company yesterday, it was a mixed blessing. As the lead underwriter for its latest secondary offering, the conflict of interest is clear. Hambrecht certainly wouldn't bash a stock it pitched to its own clients. Heavens, no! However, Dreher is one of only two major analysts following the company.
Overstock posted a great holiday quarter last month, and it made sense for the closeout specialist to thrive in uncertain economic times. But the company's $2.95 flat-rate shipping policy was just the right price to deliver Dreher a smackdown last night.
By pointing out that Hambrecht and rival Legg Mason's range of profit predictions are all over the map (without endorsing one or the other), the company symbolically shunned the Hambrecht spotlight. Legg Mason pegged 2003 earnings at $0.33 a share, while Hambrecht perched at $0.50. The online retailer also called both companies' first-quarter targets "aggressive," which doesn't bode well for Hambrecht's upgrade.
Overstock broke from its traditional role as silent observer to outsider analysis. In the past, it kept mum and topped projections on a quarterly basis. Last night, it blinked amber.
One can always question why Overstock announced a secondary offering last month. (We did, when we pointed out that it was cash-rich and profitable.) It was a cocky move by a company that clearly didn't need the greenery. Did it plan to go on a shopping spree to pick up fallen dot-com discounters? Was it arming itself for a move to bricks-and-mortar locations? Its S-1 prospectus filing hinted that the proceeds might go toward acquisitions, but that Overstock wasn't talking to any potential purchasable parties. If anything, it seemed like it planned to issue more shares. Its stock had tripled off recent lows, and, gosh darn it, Overstock could do so if it wanted to.
"When confidence is overstocked, be wary of the eventual closeout sale at marked-down prices," we wrote last month. While the stock took a hit today, it's still trading comfortably in the mid-teens after yesterday's all-time high.
Relatively speaking, we are nowhere near a fire sale here. While it's important not to read too much into the first-quarter warning (this is obviously a seasonal business, with the holidays carrying the fiscal year), the fact that the company spoke out rather uncharacteristically is significant.
Overstock is mortal. Analysts who typically underestimate can come to overestimate. Now, let's see what the company does the next time Legg Mason has something to say.