If you like the online discount retailers that sell just about
everything, but don't like the price, multiple or slowing growth
of a stock likeAmazon
(a Zacks Rank #3, who reporting in-line earnings yesterday),
with a Zacks Rank of 1 and four earnings beats in a row might be
worth a look.
Like Amazon, Overstock sells a plethora of products from
electronics and jewelry to furniture and handmade items from
global artisans; they even sell cars (I personally like their
doomsday prepper section).
While they don't sell music or have an app store or tablet
like some of their competitors; their pricing, product selection
and customer service are top notch and the company has been
delivering solid earnings growth; sometimes the K.I.S.S. method
One of the great things about this time of year is that we get
the ability to take a detailed peak into how companies are
functioning and performing. It's like having your car recently
inspected by a savvy mechanic, giving you a little more piece of
mind as you drive.
On April 18th, Overstock.com reported Q1 results that beat the
Zacks Consensus Estimates by a whopping 138.5%. Total net
revenue for Q1 2013 and 2012 was $312.0 million and $262.4
million, respectively, a 19% increase. They attributed the growth
in net revenue primarily to a 21% increase in average order size,
partially offset by a small decrease in the number of customer
On the gross profit side, they saw a 24% year over year
increase to $58.9 million, representing 18.9% and 18.1% of total
net revenue for those respective periods. The increase in gross
profit was primarily due to higher revenue and a shift in product
sales mix into higher margin home and garden products, and lower
warehousing costs, profits were partially offset by higher
Gross margins also increased 80 basis points to 18.9% from the
same quarter in 2012.
I also liked that free cash flow was on the rise, it
totaled $32.3 million and $3.5 million for
the twelve months ended March 31, 2013 and 2012,
respectively. The $28.8 million increase was due to
a $36.1 million increase in operating cash flows,
partially offset by a $7.2 million increase in capital
It was a fantastic quarter that was applauded by investors,
who took the share price from $11.00 just ahead of the report, to
its current level of $20.70, a nearly 90% jump in price.
Overstock obviously passed this checkup with flying colors!
When we explore technicals, I'll give you an idea of where you
can find support and targets for the stock.
Are Shares Worth the Price?
When you look at some of Overstock's peers, their 22.8 forward
P/E multiple seems rather cheap. Overstock, like Amazon
allows buyers to find the best prices from multiple suppliers and
gives consumers very low relative prices on many of their
A recent Nielsen State of the Media Consumer Usage Report
placed Overstock.com among the top five most visited mass
merchandiser websites. The NRF Foundation/American Express
Customer Choice Awards ranks Overstock.com #4 in customer service
among all U.S. retailers which helps when your prices are at
parity with your competitors.
Their Club O program is similar to Amazon Prime, but way more
attractive and highly used among their customer base. It
offers free shipping, rewards and discounts on select
Overstock doesn't have the infrastructure or overhead
does per se, which can be viewed as good and bad. Frankly,
I think its better that they are more technology focused as
opposed to being a mass distributor and having the huge overhead
like Amazon does.
With their 2011 O.co URL acquisition, the company is beginning
to push its international and mobile expansion and adjust their
image as an "overstock only" company. They have gone from being
an online liquidator to a diverse retailer with a multitude of
channels in which to sell product.
Their industry is ranked 30 out of 265 and is rated as a
strong buy here at Zacks and an average buy among other
I like to think of it as buying Amazon a couple years back
while they were in their strongest growth phase and for a
fraction of the 190 times P/E multiple that Amazon is trading at
The charts are the tricky part here because shares have recently
undergone a major rally. A signal of strength is that there
has been a 5 day follow-through after the initial 60% pop in the
stock, even through the turbulent market days last week.
Shares are overbought at this point in time, but I wouldn't
expect too much of a correction (relative to what we just
saw). Look for strong support around the $17.25 level,
which is the bottom of the gap and the pre-earnings high for the
Overstock has momentum on its side and everything above
current levels is really uncharted territory unless you go back
to 2010, when the stock hit a high of $26.50.
Prior to the earnings report volatility jump, it was typical
for OSTK to move about 60 cents or 5% a day, so shares were never
that tame. During a week's time, the stock will typically
oscillate about $1.50, so I would use that as our short term
retracement level from current prices.
I think shares down at the $18.00 mark would be a fair price
to pay. To the upside, I wouldn't be surprised if OSTK made
a run for that 2010 high of $26.50, at which point I would be a
The wildcard here is the broad market; even though OSTK has a
Beta of only 0.84, its recent rally has the attention of short
sellers looking for higher valuations.
If I were them, I would be looking to short Amazon, not
I think this stock has some legs on it after a small
Jared A Levy is one of the most highly sought after traders in
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