Is Overstock.com A Hidden Value Stock? One Fund Manager Thinks So (OSTK, NILE, AMZN)

There was an interesting event this week in New York City that was attended and covered by 24/7 Wall St., and that was the 3rd annual VALUE INVESTING CONGRESS.  Fund managers, investment advisors, and hedge fund managers gave numerous presentations on Wednesday and Thursday of this week.  Many VALUE STOCKS were covered.

Lisa Rapuano, portfolio manager and founder of Lane Five Capital Management, discussed several key value stocks and gave the notion that one of the best screens in finding value stocks is by searching the list of "new lows" (similar to our own "52 Week Low Club" we issue daily), and then looking for the companies that can avoid "going to zero."  When she presented Overstock.com (NASDAQ:OSTK), there were many expressions of surprise from the large audience at the Value Investing Congress.

What was interesting was that she also noted how she was an Amazon.com (NASDAQ:AMZN) loyalist that buys many items from the online e-tail and retail giant.  She noted how Overstock.com was a stock that back when her firm started screening it was hitting new daily lows and had all the recipes in place to go to zero.  But then she noted how controversial CEO Patrick Byrne was now being kept at bay by the fairly new President & COO Jason Lindsey being thought of as "adult supervision."  She also noted how the company blew out its old stale inventory without concern of the immediate charges so that it could focus on longer-term turnaround plans, noted how the company was able to raise cash via a financing (which surprised her), how the company trashed the old crummy ad campaign, and how it has been able to focus on a more attractive inventory mix and product offering that could fill a niche that Amazon.com wasn’t in.

In the presentation, she also described a site visit to Overstock.com’s facilities, noted insider ownership and a high a short interest, and had many tongue-in-cheek comments for believers and skeptics alike.  She also noted how difficult it was to make that decision and to evaluate the stock because its financial losses at the time were such that it wouldn’t fit into most VALUE INVESTING screens.  This is also not a brand new investment or a breaking call as Lane Five has been in the position, but this was a considerable surprise to the audience (and to yours truly).

One of the similar stocks that Rapuano rode up was Blue Nile Inc. (NASDAQ:NILE) as a pick from the prior year, and it sounded like Lane Five has lightened up considerably in that position.  But she did note that before the recent sell-off there that the company’s internal performance was at the higher-end of her best case scenario from the start, and she noted that Blue Nile’s stock could actually reach the vicinty of $150 per share if the company can fully execute on its plan.  So Lisa Rapuano isn’t treading into an entirely new space, and I sure didn’t get any impression that she was making any hasty decisions.

As reminder, opinions are opinions.  Sometimes they work quite well and sometimes they don’t.  I didn’t hear any exact price targets or time frame given, although Lisa Rapuano takes a long-term view and doesn’t panic out of her funds positions when the underlying thesis remains intact.  With such a huge short interest of more than 5 million shares on last look, it is always interesting to see various points of view.  They say "beauty is in the eye of the beholder," and it has been shown through time that financial metrics are as well. 

As 24/7 Wall St. enjoys screening value stocks for our Special Situation Investing Newsletter, this certainly gave us a different way of looking at some stock screens in a different light compared to traditional value screens. 

The next VALUE INVESTING CONGRESS takes place in May 6 & 7, 2008 in Pasadena, California, and 24/7 Wall St. would recommend that any value investing strategists and managers consider attending.  Sometimes a simple idea or new way of thinking about a situation can be worth millions, and there was far more than one simple idea and more than one way of thinking differently about a situation.

• Also from the conference: Freddie Mac Moves Into the Value Investing Circle.

Jon C. Ogg
November 30, 2007