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May See a Massive Squeeze in OSTK!


Parsad
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Don't hold your breath, though. These things can take time, especially if the shorts are good at dropping the price on days with good news (so that all the people who use the market as a guide go "oh, I guess the news wasn't that good after all, look at how the market is reacting"). See EBIX.  :P

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Maybe, but we saw a pretty significant squeeze two years ago when the short position was almost this high, and more recently we saw SHLD spike from about $30 to $70 in a couple of months on some good news, because their short position was about 60% of float.  Cheers!

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Maybe, but we saw a pretty significant squeeze two years ago when the short position was almost this high, and more recently we saw SHLD spike from about $30 to $70 in a couple of months on some good news, because their short position was about 60% of float.  Cheers!

 

Absolutely, I'm not saying it can't happen. Just that timing can be very hard to predict even when it looks like things shouldn't be sustainable for the shorts.

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Date           Open High Low Close

4/13/2012 $5.09 $5.10 $5.00 $5.01 Short Interest = 3.9M

4/19/2012 $5.60 $6.25 $5.55 $5.90 Reports Favorable Q1

4/30/2012 $6.10 $6.11 $5.98 $6.03 Short Interest = 4.2M

5/15/2012 $6.80 $6.95 $6.80 $6.87 Short Interest = 4.7M

 

Interestingly:

April 13th market close was $5.01/share and the short interest was 3.9M.

April 19th company announces a favorable Q1/12.

May 15th market close was $6.87/share and the short interest increased to 4.7M.

 

The short interest has increased 21% going from 3.9M to 4.7M over a period where the company has reported much improved numbers and the stock price gained 37% going from $5.01/hsare to $6.87/share.

 

*Closed today at $6.72/share. Probably over 30 days to cover based on current volume trends. Pretty risky bet on the part of the shorts.

 

 

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Yup!  Or that Fairfax is buying them out.  ;D  That would be one hell of a squeeze. 

 

Not sure why Fairfax hasn't even approached this idea.  They are looking for businesses that are expandable and will grow.  They've already held this thing for years, and it's selling for a fraction of it's revenue, while Fairfax paid far more for the shares.  They have access to capital that would allow it to grow...Sam's already on the board...and the ownership group is tightly structured. 

 

Why wouldn't Byrne be interested in owning Fairfax shares in lieu of Overstock shares?  His company would have found a permanent home and he would still directly benefit from its growth.  He would also continue to run it.  Just makes sense for Fairfax to buy them out and it would be win-win for both parties.  Cheers!

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Yup!  Or that Fairfax is buying them out.  ;D  That would be one hell of a squeeze. 

 

Not sure why Fairfax hasn't even approached this idea.  They are looking for businesses that are expandable and will grow.  They've already held this thing for years, and it's selling for a fraction of it's revenue, while Fairfax paid far more for the shares.  They have access to capital that would allow it to grow...Sam's already on the board...and the ownership group is tightly structured. 

 

Why wouldn't Byrne be interested in owning Fairfax shares in lieu of Overstock shares?  His company would have found a permanent home and he would still directly benefit from its growth.  He would also continue to run it.  Just makes sense for Fairfax to buy them out and it would be win-win for both parties.  Cheers!

 

I don't think it is that far fetched an idea. I do recall a Byrne interivew (couldn't have been that long ago) where he said he doesn't see himself doing this (running overstock) the rest of his life. In other words, I got the impression this is an investment for him, and not so much a passion for him. With the right marketing and mgmt, this company could be much more valuable that it currently is. I think FFH would be a nice fit actually.

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I don't know this company as well as you guys, but based on a market cap of $160 million it seems fairly priced relative to free cash flow. If it was consistently growing like Amazon, it could get a higher multiple, but sales and cash flow are quite erratic from year to year.

 

So here is my question, how much of the cash could be removed from the business and not impact their growth and current business? I am asking since there is a large imbalance between current assets and current liabilities if you exclude cash and the line of credit. This reminds me a bit of Danier Leather which always kept a large cash balance to finance its Fall purchase of merchandise. They could have used instead a line of credit, but chose instead a safer method of using cash. How much can be extracted from there can certainly help the thesis around the company.

 

Cardboard

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Yup!  Or that Fairfax is buying them out.  ;D  That would be one hell of a squeeze. 

 

Not sure why Fairfax hasn't even approached this idea.  They are looking for businesses that are expandable and will grow.  They've already held this thing for years, and it's selling for a fraction of it's revenue, while Fairfax paid far more for the shares.  They have access to capital that would allow it to grow...Sam's already on the board...and the ownership group is tightly structured. 

 

Why wouldn't Byrne be interested in owning Fairfax shares in lieu of Overstock shares?  His company would have found a permanent home and he would still directly benefit from its growth.  He would also continue to run it.  Just makes sense for Fairfax to buy them out and it would be win-win for both parties.  Cheers!

 

I don't think it is that far fetched an idea. I do recall a Byrne interivew (couldn't have been that long ago) where he said he doesn't see himself doing this (running overstock) the rest of his life. In other words, I got the impression this is an investment for him, and not so much a passion for him. With the right marketing and mgmt, this company could be much more valuable that it currently is. I think FFH would be a nice fit actually.

 

Frankly, I think the preference would be for Byrne to oversee things, but let others, including Jonathan Johnson or Stormy Simon run this thing.  You've got Tim Dilworth in place now for marketing as well.  Fairfax buys Overstock, puts Byrne in as a vice-president to oversee the company, as it would be the largest non-insurance business we own based on revenue, but Byrne delegates authority to Jonathan, Stormy & Tim on a day to day basis.  Cheers!

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I don't know this company as well as you guys, but based on a market cap of $160 million it seems fairly priced relative to free cash flow. If it was consistently growing like Amazon, it could get a higher multiple, but sales and cash flow are quite erratic from year to year.

 

So here is my question, how much of the cash could be removed from the business and not impact their growth and current business? I am asking since there is a large imbalance between current assets and current liabilities if you exclude cash and the line of credit. This reminds me a bit of Danier Leather which always kept a large cash balance to finance its Fall purchase of merchandise. They could have used instead a line of credit, but chose instead a safer method of using cash. How much can be extracted from there can certainly help the thesis around the company.

 

Cardboard

 

You could take most of the cash out, if they were within Fairfax and had access to a $50M line of credit.  As well, if they eliminated the direct business altogether...have no friggin' clue for years now why they are even in this business...and you would have a company that cycles through their inventory about 38-40 times a year.  Margins are better in the affiliate business, with no inventory risk as their purchasing is not very good on the direct side. 

 

If they just stuck to the affiliate business, kept expenses tight with none of this legal expense, they would be profitable every quarter (except the third as they ramp up G&A/Technology for the big 4th quarter), and could run the business solely on internal cash flow and if necessary the line of credit...and that would be on slim margins of about 1.5-2% net.  Cheers!

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I don't know this company as well as you guys, but based on a market cap of $160 million it seems fairly priced relative to free cash flow. If it was consistently growing like Amazon, it could get a higher multiple, but sales and cash flow are quite erratic from year to year.

 

So here is my question, how much of the cash could be removed from the business and not impact their growth and current business? I am asking since there is a large imbalance between current assets and current liabilities if you exclude cash and the line of credit. This reminds me a bit of Danier Leather which always kept a large cash balance to finance its Fall purchase of merchandise. They could have used instead a line of credit, but chose instead a safer method of using cash. How much can be extracted from there can certainly help the thesis around the company.

 

Cardboard

 

You could take most of the cash out, if they were within Fairfax and had access to a $50M line of credit.  As well, if they eliminated the direct business altogether...have no friggin' clue for years now why they are even in this business...and you would have a company that cycles through their inventory about 38-40 times a year.  Margins are better in the affiliate business, with no inventory risk as their purchasing is not very good on the direct side. 

 

If they just stuck to the affiliate business, kept expenses tight with none of this legal expense, they would be profitable every quarter (except the third as they ramp up G&A/Technology for the big 4th quarter), and could run the business solely on internal cash flow and if necessary the line of credit...and that would be on slim margins of about 1.5-2% net.  Cheers!

 

I could also see Prem and Francis doing a straight debt deal to buy in stock as was suggested.  OSTK basically has no debt at the moment. Prem and Francis have been recent holders of OSTK debt. If they did a straight debt deal they could put a chunk of money to work at reasonable rates. (Say even $60M at 9%). It costs about $5.4M annually. The cash gets used to buy in stock of which both Prem/Francis amung the largest holders. The buyback concentrates a larger piece of the pie into their hands, raises the stock price significantly given the high short interest, puts $60M more to work in a safer part the capital structure at a reasonable rate.

 

Everybody wins!

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I don't know this company as well as you guys, but based on a market cap of $160 million it seems fairly priced relative to free cash flow. If it was consistently growing like Amazon, it could get a higher multiple, but sales and cash flow are quite erratic from year to year.

 

So here is my question, how much of the cash could be removed from the business and not impact their growth and current business? I am asking since there is a large imbalance between current assets and current liabilities if you exclude cash and the line of credit. This reminds me a bit of Danier Leather which always kept a large cash balance to finance its Fall purchase of merchandise. They could have used instead a line of credit, but chose instead a safer method of using cash. How much can be extracted from there can certainly help the thesis around the company.

 

Cardboard

 

You could take most of the cash out, if they were within Fairfax and had access to a $50M line of credit.  As well, if they eliminated the direct business altogether...have no friggin' clue for years now why they are even in this business...and you would have a company that cycles through their inventory about 38-40 times a year.  Margins are better in the affiliate business, with no inventory risk as their purchasing is not very good on the direct side. 

 

If they just stuck to the affiliate business, kept expenses tight with none of this legal expense, they would be profitable every quarter (except the third as they ramp up G&A/Technology for the big 4th quarter), and could run the business solely on internal cash flow and if necessary the line of credit...and that would be on slim margins of about 1.5-2% net.  Cheers!

 

I could also see Prem and Francis doing a straight debt deal to buy in stock as was suggested.  OSTK basically has no debt at the moment. Prem and Francis have been recent holders of OSTK debt. If they did a straight debt deal they could put a chunk of money to work at reasonable rates. (Say even $60M at 9%). It costs about $5.4M annually. The cash gets used to buy in stock of which both Prem/Francis amung the largest holders. The buyback concentrates a larger piece of the pie into their hands, raises the stock price significantly given the high short interest, puts $60M more to work in a safer part the capital structure at a reasonable rate.

 

Everybody wins!

 

Yup, that works too, but I have a hard time seeing Byrne agree to a 9% yield.  He probably would be looking at 7.5% at best, otherwise something like this would have been done by now.  It would just make sense, and I think it hasn't happened because Fairfax probably wants a higher yield for the investment risk than Byrne is willing to pay.  Cheers!

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I don't know this company as well as you guys, but based on a market cap of $160 million it seems fairly priced relative to free cash flow. If it was consistently growing like Amazon, it could get a higher multiple, but sales and cash flow are quite erratic from year to year.

 

So here is my question, how much of the cash could be removed from the business and not impact their growth and current business? I am asking since there is a large imbalance between current assets and current liabilities if you exclude cash and the line of credit. This reminds me a bit of Danier Leather which always kept a large cash balance to finance its Fall purchase of merchandise. They could have used instead a line of credit, but chose instead a safer method of using cash. How much can be extracted from there can certainly help the thesis around the company.

 

Cardboard

 

You could take most of the cash out, if they were within Fairfax and had access to a $50M line of credit.  As well, if they eliminated the direct business altogether...have no friggin' clue for years now why they are even in this business...and you would have a company that cycles through their inventory about 38-40 times a year.  Margins are better in the affiliate business, with no inventory risk as their purchasing is not very good on the direct side. 

 

If they just stuck to the affiliate business, kept expenses tight with none of this legal expense, they would be profitable every quarter (except the third as they ramp up G&A/Technology for the big 4th quarter), and could run the business solely on internal cash flow and if necessary the line of credit...and that would be on slim margins of about 1.5-2% net.  Cheers!

 

I could also see Prem and Francis doing a straight debt deal to buy in stock as was suggested.  OSTK basically has no debt at the moment. Prem and Francis have been recent holders of OSTK debt. If they did a straight debt deal they could put a chunk of money to work at reasonable rates. (Say even $60M at 9%). It costs about $5.4M annually. The cash gets used to buy in stock of which both Prem/Francis amung the largest holders. The buyback concentrates a larger piece of the pie into their hands, raises the stock price significantly given the high short interest, puts $60M more to work in a safer part the capital structure at a reasonable rate.

 

Everybody wins!

 

Yup, that works too, but I have a hard time seeing Byrne agree to a 9% yield.  He probably would be looking at 7.5% at best, otherwise something like this would have been done by now.  It would just make sense, and I think it hasn't happened because Fairfax probably wants a higher yield for the investment risk than Byrne is willing to pay.  Cheers!

 

Yes, i think that's more reasonable. I just pulled a number out of a hat - intentionally high to show the cost of funding (even at a higher rate) could be much less than the benefit of buying back stock at these levels.

 

 

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You could take most of the cash out, if they were within Fairfax and had access to a $50M line of credit.  As well, if they eliminated the direct business altogether...have no friggin' clue for years now why they are even in this business...and you would have a company that cycles through their inventory about 38-40 times a year.  Margins are better in the affiliate business, with no inventory risk as their purchasing is not very good on the direct side. 

 

If they just stuck to the affiliate business, kept expenses tight with none of this legal expense, they would be profitable every quarter (except the third as they ramp up G&A/Technology for the big 4th quarter), and could run the business solely on internal cash flow and if necessary the line of credit...and that would be on slim margins of about 1.5-2% net.  Cheers!

 

Parsad, on 1.5-2% net margin, which I was assuming as well, how cheap do you think the stock is?

 

$1 billion in revenues, and assuming a $175mn market cap ($7 stock X 25mn shares diluted), that works out to a P/E range of 9-12, which doesn't look to cheap. I know I'm not assuming any growth, but that is far from a sure thing in such a competitive industry. If we back out net cash of $65mn, then it works out to an EV/E of 5.5-7, which looks attractive. If revenues were to grow by 25%, then that range decreases to 4.5-6, but again, that isn't a sure thing.

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You could take most of the cash out, if they were within Fairfax and had access to a $50M line of credit.  As well, if they eliminated the direct business altogether...have no friggin' clue for years now why they are even in this business...and you would have a company that cycles through their inventory about 38-40 times a year.  Margins are better in the affiliate business, with no inventory risk as their purchasing is not very good on the direct side. 

 

If they just stuck to the affiliate business, kept expenses tight with none of this legal expense, they would be profitable every quarter (except the third as they ramp up G&A/Technology for the big 4th quarter), and could run the business solely on internal cash flow and if necessary the line of credit...and that would be on slim margins of about 1.5-2% net.  Cheers!

 

Parsad, on 1.5-2% net margin, which I was assuming as well, how cheap do you think the stock is?

 

$1 billion in revenues, and assuming a $175mn market cap ($7 stock X 25mn shares diluted), that works out to a P/E range of 9-12, which doesn't look to cheap. I know I'm not assuming any growth, but that is far from a sure thing in such a competitive industry. If we back out net cash of $65mn, then it works out to an EV/E of 5.5-7, which looks attractive. If revenues were to grow by 25%, then that range decreases to 4.5-6, but again, that isn't a sure thing.

 

I know your question wan't directed at me but I'd suggest this is a free cash flow story similar to Amazon. That's how I think it should be viewed.

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Mephistopheles,

 

Start by reading this fantastic Letter to Shareholders (circa 2004) from Jeff Bezos.

 

http://library.corporate-ir.net/library/97/976/97664/items/144852/2004_shareholderLetter.pdf

 

I'd apply the same framework to Overstock. Cash flow is driven primarily by increasing operating profit dollars and efficiently managing: working capital; capital expenditures and the share count. Have a look at what Overstock is accomplishing by analyzing closely these components.

 

Think about how the following things will effect OSTK's cashflow/share in 2012;

 

1) reducing the head count yoy from 849 to 706

2) reducing debt

3) reducing legal costs to a more normalized level

4) regaining topline growth

5) improving contribution margin back to 12.5% range

6) continued shift of direct revenue to fulfillment revenue which is more profitable

7) consider the need for tech investments

8.) consider the companies ability to potentially expand payable periods in the future thereby reducing working capital needs.

9) as is being discussed above ... what if share count is reduced using debt or simply through a buyback with the excess cash?

 

The company has excess cash. It's debatable how much. I'll leave that for you to decide but once removed the operations seems to trade at a low multiple to free cash flow. And, my belief is that Revenue has lot's of room to grow in the future. We'll see.

 

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A ~$25-30M operation, implemented over a fairly short period... it might be a 'one man show' of sort. Not necessarily leading to a squeeze, if this 'man' has some capital and breath...

 

http://www.schaeffersresearch.com/chartfx62/temp/CFT0606_11254537B28.png

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  • 1 month later...

Mephistopheles,

 

Start by reading this fantastic Letter to Shareholders (circa 2004) from Jeff Bezos.

 

http://library.corporate-ir.net/library/97/976/97664/items/144852/2004_shareholderLetter.pdf

 

I'd apply the same framework to Overstock. Cash flow is driven primarily by increasing operating profit dollars and efficiently managing: working capital; capital expenditures and the share count. Have a look at what Overstock is accomplishing by analyzing closely these components.

 

Think about how the following things will effect OSTK's cashflow/share in 2012;

 

1) reducing the head count yoy from 849 to 706

2) reducing debt

3) reducing legal costs to a more normalized level

4) regaining topline growth

5) improving contribution margin back to 12.5% range

6) continued shift of direct revenue to fulfillment revenue which is more profitable

7) consider the need for tech investments

8.) consider the companies ability to potentially expand payable periods in the future thereby reducing working capital needs.

9) as is being discussed above ... what if share count is reduced using debt or simply through a buyback with the excess cash?

 

The company has excess cash. It's debatable how much. I'll leave that for you to decide but once removed the operations seems to trade at a low multiple to free cash flow. And, my belief is that Revenue has lot's of room to grow in the future. We'll see.

 

 

I know that it's been over a month. But thanks for this very informative post. I will read through the AMZN letter now.

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That is an interesting prospect, partly because I've owned a significant holding in FFH for a number of years, which has been profitable. On the other hand, I've also owned a substantial position in OSTK since about the same time, and that holding is down 65%. Both companies experienced criminal manipulative attacks against their share price and fought back. OSTK has fought even more fiercely, but the predators have been relentless, continuing to suppress the share price even in the face of tightening litigation exposure.

 

PB has been sensitive to protecting shareholder interests against any stock buyback or sellout at suppressed share prices. No doubt he fully understands that OSTK is worth much more than the current share price indicates. A fair price might be negotiated with  FFH, but I don't know whether PB would want to sell the litigation rights or whether FFH would want to buy them. That aspect is problematic, because if the company is separated from the litigation rights, then funding the litigation would become an issue and the defendants would likely dig in even deeper. JMO

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PB has been sensitive to protecting shareholder interests against any stock buyback or sellout at suppressed share prices.

 

I understand protecting against a sellout, but what do you mean by protecting against a stock buyback at a suppressed price? Buybacks are supposed to be done at suppressed prices, and PB has teased us about it several times this year, but has never gone ahead with it.

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