Overstock (NASDAQ:OSTK) announced its fourth-quarter results Mar. 18 before the markets opened. They were awful. Early trading showed OSTK stock off by more than 9%. If you’re investing for your 401(k) or IRA, you can stop reading. OSTK is a dog with fleas.
However, if you’re a speculative investor, there’s an argument to be made why you might consider buying Overstock on the dip
Overstock is up 51% year-to-date through Mar. 15, 58% off its 52-week low hit in December. With the markets as a whole on a bit of a roll, from a momentum perspective, Overstock is worth considering if you don’t mind the risk — and there’s plenty of it.
A Change of Direction
CEO Patrick Byrne is a colorful character. Not shy to express himself, the company’s short Q4 2018 message to shareholders suggests he’s ready to change course for the umpteenth time.
“Our retail arm lost money last year because I gunned things in an attempt to create a conventional high-growth/money losing e-commerce business, but the losses were nauseating and we reverted back to the philosophy of profitability on which we built Overstock: as a result, in 2019 Retail will return to profitability, generating a positive operating cash flow ≥ $10M,” Byrne stated in its press release.
To be precise, Overstock’s retail arm had a pre-tax loss of $158.6 million on $1.8 billion in revenue. So, pre-tax losses increased by 524% while revenues rose by a respectable, if not spectacular 4%.
Over at tZero, the company’s majority-owned financial blockchain business, revenues increased 15% while pre-tax losses increased by 233% to $40.9 million. The company’s remaining blockchain investments are carried as “Other” under its business segments. It had less than $2.4 million in revenue in 2018 with pre-tax losses of $20.5 million, both significantly higher than a year earlier.
Overall, Overstock had a net loss of $216.6 million in 2018, 94% higher than in 2017, and considerably worse than the year before that when it made $11.2 million.
Selling the Retail Business
Right there in the 10-K, it says that the company has retained Guggenheim Securities to explore strategic alternatives that include selling the retail business and raising additional debt and equity offerings.
I’m not sure if this is a new engagement or an ongoing thing because Guggenheim was set to underwrite a share offering around this time last year but pulled it due to weak market conditions. That’s probably a good thing as buyers would be sitting on a 47% loss on those shares.
Perhaps Byrne wants to get the retail business profitable before pulling the trigger on a sale.
However, as my InvestorPlace colleague Vince Martin said recently, it’s hard to know when Byrne is telling the truth and when he’s exaggerating it.
“The CEO [Byrne] told the Wall Street Journal in November that the retail business would be sold by February. OSTK stock soared on the news,” Martin wrote. “Since today is March 1, I can now say that Overstock missed that target.”
In my January 2018 article, I advised investors to avoid OSTK stock because of two reasons.
First, the CEO was using blockchain to distract shareholders from the fact its retail business is hopelessly unprofitable. Secondly, there are better ways to play blockchain technology that won’t see you lose 50% of your investment.
Since then, OSTK stock is down 77%.
The Bottom Line on OSTK Stock
InvestorPlace’s Josh Enomoto discussed in January the reasons investors shouldn’t buy Overstock. His conclusion says it all.
“As you know, the cryptocurrency markets have taken a beating. However, the blockchain technology driving decentralized investing platforms remains both relevant and viable. Therefore, it won’t surprise me if bitcoin and other digital assets start moving higher,” Enomoto wrote Jan. 25.
“If so, I can easily see the OSTK stock price rising in solidarity. But I would caution against conflating emotion-driven bullishness with fundamentally-sound optimism. Ultimately, Overstock is a poorly managed organization associated with a groundbreaking platform.”
Stocks like Overstock are why regular investors should stick to exchange-traded funds. Such stocks are too unpredictable, and they have no business being in a tax-advantaged account because capital losses are useless to you.
That being said, a speculative investor who can afford to lose the entire investment might consider making a bet under $15, because you never know, Byrne might sell the business at some point.
Everyone else should steer clear.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
