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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 like Amazon AMZN (a
Zacks Rank
#3, who reporting in-line earnings yesterday), then Overstock.com OSTK 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 works best.
Earning
Checkup
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 orders.
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 freight costs.
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 expenditures.
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
products.
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 products.
Overstock doesn’t
have the infrastructure or
overhead that Amazon AMZN 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
analysts.
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 now.
The
Charts
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
shares.
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 seller.
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 Overstock.
I think this stock
has some legs on it after
a small retracement.
Jared
A Levy is one of the most highly sought after traders in the world and
a former
member of three major stock exchanges. That is why you will frequently
see him
appear on Fox Business, CNBC and Bloomberg providing his timely
insights to
other investors. He has written and published two tomes, “Your
Options Handbook” and “The
Bloomberg Visual Guide
to Options”.
You can discover more of his insights and recommendations through his
two
portfolio recommendation services:
Zacks Whisper
Trader– Learn to
buy stocks likely to have robust earnings BEFORE they report.
Zacks TAZR Trader
– Technical Analysis +
Zacks Rank. Best of both worlds approach to find timely trades.
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AMAZON.COM INC (AMZN): Free Stock Analysis Report
OVERSTOCK.COM (OSTK): Free Stock Analysis Report
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