On Overstock’s Terrible Third Quarter

I did not expect to learn anything significant about Overstock.com (OSTK) until the fourth quarter results were in, because the Christmas season is so critical to the company’s success. However, Monday’s announcement of a year-over-year decline in revenue was completely unexpected.

Based on Byrne’s remarks and the reported results, it looks like Overstock got everything right except conversions. I was pleasantly surprised with how well the company managed its IT systems and its inventory. In the past, management had made mistakes in these areas and Overstock paid the price. This quarter they did a great job on both fronts.

Unfortunately, the fantastic growth that had allowed Overstock to move forward despite serious missteps (in previous quarters), was totally absent this quarter.

In his letter to owners, Byrne wrote:

“In the past we ran at an A- and regularly generated 100% growth: now I think we are running at an A+ but seeing no growth. I am not entirely sure what to make of that.”

I agree. That’s the real story. The company gave its best performance – and posted its worst results. The CEO can’t explain it and I can’t either.

At the beginning of this year, I thought Overstock could grow sales at 10-15% for the year. I expected to see total sales for 2006 of between $875 million – $925 million. In the first three quarters of 2006, the company only generated about $500 million in sales. So, Overstock would need $375 million to $425 million in sales during Q4 to get to where I expected them to be at the end of the year. To put that in perspective, the company had sales of $318 million in Q4 of ’05.

So, Overstock would need to post year-over-year growth of 18 – 34% during the fourth quarter of this year just to reach a target I thought was sufficiently conservative when I set it about a year ago.

Then, there’s the issue of cash. Like I said, Overstock did everything right this quarter and still posted very poor results.

In February, I wrote that “Insolvency could only occur through gross managerial ineptitude”. Clearly, I was wrong. Overstock’s management is not inept; in fact, they’ve made meaningful improvements to the business in the first nine months of 2006. Overstock is a much more efficient operation today than it was a year ago.

However, there is a real risk of insolvency. If Overstock’s fourth quarter results don’t show year over year growth of at least 15-20%, it seems nearly certain they will have to raise cash in 2007.

Even if the fourth quarter looks great, there may be a need to raise cash. If the company has to raise cash while its prospects appear terribly dim, the terms on which the cash is raised are likely to be extremely detrimental to current shareholders.

Overstock has a solid business model. Unfortunately, the logic of that model is predicated upon sales volume growth. The business simply …

Guest Columnists Wanted

I’m always looking for additional contributing writers. Contributors must be:

1) Passionate about investing
2) Curious about investing
3) Able to think and write clearly about investing
4) Willing to work with an editor (me)
5) Willing to work for free

If you’re interested in writing for the site, please send me an email.…

Guest Columnists

As part of my continuing effort to increase both the amount of content and the diversity of content on this site, I’m proud to present two new guest columnists: Max Olson and Steven Rosales.

I’ve added a “Columns” section to the website. If you look in the “Navigate Site” box on the right-hand side of your screen, you will see that the third link down now reads “Columns”. This link will take you to the Gannon On Investing Guest Columns Page, which presents all the articles written by guest columnists in reverse chronological order (i.e., in the same manner as a blog).

If you’d prefer you can jump directly to a specific column by following one of the links a little further down on the page. Once again, if you look to the right-hand side of your screen, you will see that the third box down is entitled “Guest Columnists”. Currently, there are two links in that box: “Max Olson” and “Steven Rosales“. Simply click on the name of a columnist and you’ll see his latest articles.

For now, I’ve only posted one article from each guest columnist. Of course, you’ll see many more articles appear in the days ahead.

Please take this opportunity to sample the work of each writer.

Column: Max Olson

Column: Steven Rosales

Max’s articles will cover a variety of different topics in value investing. Steven has a series of articles planned. His first article serves as an introduction to that series. Therefore, I’m reprinting it below:

I am a new investor. What does that mean? Simply that I do not have much experience investing. While I had read books about investing and was aware of the stock market, I had never given much thought to investing.

I saw the stock market as a competition where I was at a disadvantage; investing involved too much risk for the potential reward. Therefore, as of January 1, 2006, I had never purchased a stock. But that has changed. It changed because I reached a point in life where I had funds to invest and needed to make some decisions on how to invest them.

Now many people think that the best way to invest is to place your money with a mutual fund. I was one of those people up until November 2005 when I read John Bogle’s book on mutual funds. Two things about this book stood out to me. The first was that whether the fund increases or decreases my investment, the people who are running it get paid, and that these “fees” impact my investment results (if I am up 10% on the year, and I have to pay a total expense fee of 1.5%, I have actually only made 8.5%).

The second point that stood out to me was the fact that the vast majority of money managers do not outperform the stock market. In his book, Bogle points out that most people would be better off just …

Book Review: Pit Bull

Gannon On Investing’s contributing writer, Steven Rosales, reviews Martin Schwartz’s Pit Bull.

Read Book Review…

Value Investing News: Top Ten Stories

Here are this week’s top ten stories from Value Investing News:

1. Proof that losing money really is scary
2. What’s Berkshire Hathaway Worth, Anyway?
3. Berkshire Press Release: Equitas Reinsure & Run-Off Deal
4. The Cost of Anchoring
5. (Geoff Gannon) On the Round Table Discussion
6. Jeff Matthews Is Not Making This Up: Baby Boomers Remembering When
7. Free Advice from All-Star Managers
8. The Worst Has Yet to Come for Regional Airlines
9. ValueBlogReview: Morningstar’s Classroom
10. Buffett in Lloyd’s deal

Please be sure to vote either up or down on these stories as you read them. You will earn points each time you vote that will go towards winning the monthly prize, which is the The Little Book of Value Investing this month. All you have to do is register and log in to be able to vote and submit your own favorite value investing articles.

Voting also helps generate a customized list of recommended articles tailored to your preferences.

As I’ve said before, I’m a huge fan of Value Investing News. When you use the site, you’ll notice that a user named “Geoff” has submitted a lot of stories to the site. So, if you want to know what I’m reading, just browse Value Investing News.

The more people use the site, the better it will become.…

On the Round Table Discussion

On Wednesday, the value investing site Modern Graham hosted a round table discussion involving three participants: Rick Konrad of Value Discipline, Doug McIntyre of 24/7 Wall St., and (me) Geoff Gannon of Gannon On Investing.

You can read the entire discussion here.

Since this is my blog, I will pull a few of my own answers from the discussion to share with you. I’ll let Rick and Doug talk about their answers on their own blogs.

How do you value a particular stock, and further what valuation techniques do you utilize in doing so?

Well, I would say I tend to value businesses rather than stocks, by which I mean I look first to a “capitalization independent” measure like EV/EBIT. I think the inverse (EBIT/EV) is a good measure for comparing the yields on various stocks and bonds. So, that would be the standard measure of how cheap or expensive a stock is for me.

However, there are many situations (and here is usually where you find some bargains) where the EV/EBIT measure is not the most useful. When I can predict a high free cash flow margin with confidence, I use a very long-term discounted cash flows calculation. For instance, this is what I would do with Hanes Brands (HBI), which was recently spun-off from Sara Lee (SLE). On an EV/EBIT basis, it may not look cheap. But, looking truly long-term, I’m convinced the intrinsic value of each share is much closer to the $45 – $65 range than the roughly $23.00 a share at which it now trades. But, that’s a special case – Hanes is a special business.

In other situations, where I don’t think the company can do more than the industry average long-term, I’ll use book value. So, that would be banks and insurance companies obviously as well as some industrials on occasion.

What are your views of the current market and the direction we are headed?

Since my approach is completely bottom up rather than top down, I really do see it as a market of stocks rather than a stock market. So, I can’t comment on the level of the general market, but I can comment on the presence of bargains – they’re scarce.

That isn’t to say most stocks are terribly expensive. But, it has become increasingly difficult to find bargains – at least the kind of bargains I’m looking for.

This isn’t a time of the Nifty Fifty or the dot com bubble – you don’t have wide price disparities that are clearly unjustified. What you do have is a pretty flat and (in my view) barren investing landscape.

I mentioned Hanes. That’s a notable exception, but it’s also a spin-off. I think that’s telling. I don’t have very many good ideas these days – honestly, I’m at the lowest point since 2000 in terms of good ideas. For me, this is definitely the toughest environment in more than half a decade.

Traffic at uTube.com Surges 440%

Traffic at uTube.com recently jumped more than 440%. The website is operated by Universal Tube & Rollform Equipment Corporation, a company that “specializes in buying and selling used tube mills, used pipe mills and used rollforming machines”.

On its homepage, the company proudly proclaims:

“Our machines are stored in our 125,000 Sq. Ft, Perrysburg Ohio Warehouse. We have the ability to rebuild, retrofit or recondition each piece of equipment in our inventory. We are committed to being the number one supplier of used Tube & Pipe equipment in the world!”

Unfortunately, the company recently encountered a major setback in its noble effort to become the world’s number one supplier of used tube and pipe equipment. Last week, the company’s website was paralyzed by the actions of a large (allegedly “not evil”) American corporation.

On Saturday, October 14th, Universal Tube put out this press release:

“We apologize to those who have tried to view our webpage during the last few weeks and were unable. The uTube.com website is now up and running strong after being paralyzed this week by the announcement of Google purchasing the popular YouTube.com video website for $1.65 billion. Millions of people inadvertently typed the URL uTube.com coming to our site instead of the YouTube.com they were actually trying to reach. The heavy traffic flow shut down our website again and again. We have moved our website 4 times during the last week to servers with additional bandwith capable of handling our own customers and reps along with the influx of video searchers.”

Others in the financial media have already reported on this story. However, I had to address the topic myself, as they’ve clearly missed the point. They tended to focus on the Google (GOOG) angle, writing about the fact that millions of people typed in an incorrect web address after seeing television and newspaper accounts of Google’s acquisition of YouTube.com.

After visiting uTube.com, I am now convinced the real story is Universal Tube. Any company that puts an exclamation mark after a statement like “we are committed to being the number one supplier of used tube and pipe equipment in the world” and puts out press releases on Saturdays is clearly worthy of an investor’s attention.

Sadly, Universal Tube appears to be a privately held concern.

On a related note, I suspect Universal Tube & Rollform Equipment Corporation’s accountants will be pleased to know their job will be a lot easier this year. I’m guessing their periodic review of the uTube.com domain name will find that the asset’s fair value is at least equal to its carrying value.

However, the company’s lawyers may find they have more work rather than less. May I be the first to suggest they press Google to change the newly acquired web property’s slogan to: You Tube, Broadcast Yourself – not affiliated with Universal Tube and Rollform Equipment Company.

It rolls right off the tongue.

Visit uTube.com…

Book Review: The Neatest Little Guide to Stock Market Investing

Gannon On Investing’s contributing writer, Steven Rosales, reviews Jason Kelly’s The Neatest Little Guide to Stock Market Investing.

Read Book Review…

Announcement: Modern Graham Round Table Discussion

The value investing site Modern Graham will be hosting a round table discussion on Wednesday, October 18th. I will be one of the participants.

Below, I’m reprinting Modern Graham’s description of the round table discussion. You can either send your questions to me or send them directly to Modern Graham.

At this point, I have no idea what the discussion will be like. It’s really up to you.

How this works:

Readers may submit questions via comments left on this post or the contributor’s blogs, or by email to [email protected]. Jon and I will compile the questions and moderate the discussion. Please submit as many questions as you can think of. This discussion can only be as interesting as the questions are.

The actual discussion will be held in this thread of our forum. The thread will be open to the public to read, but only the participants will be allowed to post.

We are excited to have the following people contribute to the discussion:

Rick – Value Discipline

Rick has been a portfolio manager of institutional portfolios for over 25 years. He is currently working with individuals rather than institutions and finds this much more satisfying and rewarding. His greatest joy outside of his family is training young people to become better research analysts.

Geoff Gannon – Gannon On Investing

Geoff leads Gannon On Investing, a value investing blog and value investing podcast influenced by Benjamin Graham, Joel Greenblatt, and Warren Buffett’s value investing model. Built upon the value investor insights of intrinsic value, margin of safety, competitive advantage, and protection of principal.

Doug McIntyre – 24/7 Wall St.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about.

Visit Modern Graham

Visit Value Discipline

Visit 24/7 Wall St.…

Value Investing News: Top Stories

In an effort to promote Value Investing News, a new community driven value investing news site, I’m listing the top five stories of the week. George already did this on his site. But, I thought the list was worth reprinting here, as it might encourage some people to give Value Investing News a try.

As you can probably tell, I love Value Investing News. If you register at Value Investing News, you can see evidence of my devotion to the site by checking out the “Highest Users” list. Some user named “Geoff” seems to be at the top. So, if you want to know what I’m reading online, just go to Value Investing News.

This Week’s Top Five Stories

1. Are Homebuilders Worth More Than Book Value?
2. Three Ways We Can Beat Mr. Market
3. Why Study the Fundamentals?
4. Don’t Ever Be Around for the Dividend Cut
5. Highest-Yielding Magic Formula Stocks

Visit Value Investing News

Visit Fat Pitch Financials…