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The Latest on Overstock.com and Francis Chou’s Stake with the Online Retailer

October 31, 2012 | About:
Utah-based Overstock.com (OSTK) has reported its third quarter results on Oct. 25 per the welcoming of a new earnings season, covering the months between July and September. Guru investor and 10% owner of Overstock, Francis Chou of Chou Associates Management, reduced his holding of the stock one day later.

Overstock experienced increases in revenue by 7%, gross profit by 21% and diluted earnings per share by $0.44, in a year-over-year comparison with 2011 data.

A spike in site visitors combined with average order sizes fueled the surge in revenue, according to the results. The company also increased in sales and marketing expenses by 8%, which propelled the positive climb in gross profits, in addition to an alteration in pricing strategies.

Additionally, reduced staffing and lower legal fees contributed to less technology and G&A expenses (general and administrative), accounting for 6% and 10% decreases.

Currently, Overstock is down 2%, trading at $15.19 per share, close to its one-year high of $15.50.

Chou decreased his Overstock shareholding by 42,500 shares on Oct. 26, making this his first reduction of the stock since adding it to his American fund, Chou Opportunity Fund, in the first quarter of 2012.

Chou Opportunity Fund is one of two funds started in 2010 incorporated in the United States , that are managed by Toronto-based Chou Associates; the other one is Chou Income Fund.

The transaction purpose was outlined in Chou’s SEC filing stating: The transaction was “due to appreciation” and that “the value of investments in securities of the issuer represented over 30%” of the fund’s total investments, as of the date of the transaction. Additionally, the transaction “was effected solely for diversification purposes and more specifically, to reduce the concentration of the fund’s investments in securities…As of the date hereof, [Chou Associates] continues to believe that the subject of class of securities is undervalued and represents an attractive investment opportunity.”

During a Fairfax shareholder dinner in April hosted by Sanjeev Parsad of business-investment firm Corner Market Capital Corp., Chou, who was in attendance with fellow value investor Prem Watsa and several others, was noted giving his insight on his shareholding of Overstock.

In a transcribed summary of the dinner by financial consultant and founder of stock research site, StingyInvestor.com, Norman Rothery first cited Overstock in comments made by Hamblin-Watsa’s Sam Mitchell.

According to Rothery, Mitchell said that Fairfax Financial Holdings’ decision to switch to Overstock was wrong because it “did not stick to its value proposition which was ‘great stuff at low prices,’” by establishing its O brands, and referring to Overstock as one of the firm’s “screw ups from last year.”

Chou then responded to Mitchell with a mentioning of Overstock’s market cap at the time, and $30 million to $40 million in excess cash, making a point that the company’s “legal expenses will likely fall, and [Fairfax]’s results will be much better without them – a good value.”

The legal expenses that Chou referred to were Overstock’s long-time legal battle against several of its brokers and financial servicers, particularly Goldman Sachs and Morgan Stanley, among others.

Under Case No. CGC-07-460147, filed through the Superior Court of California, San Francisco County, Overstock sued the companies in February 2007, alleging they manipulated the securities market causing the price of Overstock shares to decline.

In an Overstock press release posted the same day the company filed suit, chairman and chief executive officer, Patrick Byrne said, “I believe that this conduct is harming our company and our shareholders deeply, and investors have been failed by those who have a duty to protect them.” The release also stated Overstock sought $3.48 billion in damages.

After years of court proceedings, the judge of the case, Judge John E. Munter, reached a decision on Jan. 10 claiming in court filings that the parties being sued “presented competent, affirmative evidence showing that the plaintiffs [Overstock] cannot establish that any of the defendants engaged in acts of market manipulation in California.”

In Chou’s 2012 semi-annual letter to shareholders, he noted that Overstock contributed to the fund’s negative performance in the first half of the year, along with RadioShack Corp. (RSH) and Level 3 Communications (LVLT). Chou Associates also listed Overstock as a decline contributor in its 2011 annual report.

With a market cap of $363.3 million, Overstock has a P/B ratio of 19.58 and a P/S ratio of 0.3. It has a Business Predictability rank of 1 out of 5 stars, a Financial Strength rank of 6 out of 10 and a Profitability and Growth rank of 5 out of 10.

To read more about Francis Chou and his investments, visit these GuruFocus articles:

Francis Chou: The Investment Guru that You’ve Never Heard Of

Francis Chou’s Semi-Annual Letter

Latest Picks from Francis Chou

Canadian Guru Francis Chou Buys Bank of America Warrants, Citigroup, Sears

Francis Chou on Overstock

About the author:

Dianne Tordillo
Dianne Tordillo is staff writer for GuruFocus.com. She reports on a variety of financial news, primarily dealing with investor portfolios and stock trades. Her articles also highlight insider trades, as well as the many useful features of GuruFocus.

Visit Dianne Tordillo's Website


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