 |
|
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
  RSS FEEDS |
Recognizing multibagger opportunities is difficult for most investors. Even when the opportunity sits squarely in front of them, most investors fail to see it.
An opportunity of similar magnitude to buying Amazon below $7 in 2001 exists today for investors in Overstock (OSTK - commentary - Cramer's Take). Over the next eight to 10 years, it's reasonable to expect Overstock will reach $4 billion in annual sales. If the operating model matures as I anticipate, the earnings and free cash flow will justify a business value of at least $4 billion, or more than nine times today's market value. While that may seem outrageous to some, there's a good chance that I'm too conservative. My sales-growth expectations, at 17% annually, are probably too low. Sales may be closer to $5 billion to $6 billion in eight to 10 years as Overstock continues to take share in the excess-inventory market, which is currently a $60 billion addressable market. Inefficient distribution of excess inventory is an expensive "headache" for brand-name manufacturers. Overstock cures that headache, as I explained in this earlier column: Excess inventory levels are notoriously irregular and difficult for manufacturers to manage. They have to deal with unpredictable change in both the nominal level and across product categories. Using a single distribution partner, like Overstock, requires no capital outlay by manufacturers and results in fast conversion of excess inventory to cash. Another reason my calculations may be too conservative is that the advantages of Overstock's business model may eventually command a premium valuation, perhaps 1.5 times sales. This implies a business value that is about 15 times the current value within this eight- to 10-year time period. A model like Amazon is subject to assault based on price. For example, Buy.com is advertising books at 10% below the Amazon price. As I explained in the same column, Overstock's model doesn't have the same vulnerability: The online space that Overstock competes in is a winner-take-all category. As with eBay (EBAY - commentary - Cramer's Take) in the online auction space, there's a self-reinforcing dynamic at work here. Buyers naturally migrate to the inventory liquidation site that has the most product, and sellers want to sell on the site that has the most buyers. It's a mistake to underestimate the importance of this dynamic -- or its potential long-term value. The 'Magic' of Organic GrowthLook at the analyst reports in the early years of every great organic growth story, and you'll see that analysts miss this critical variable each and every time. That is, they underestimate earnings leverage. Organic growth begets powerful earnings leverage because it's exponentially cheaper to grow organically than to grow via acquisition.
Go to NEXT PAGE
At time of publication, Alsin and/or ACM was long Overstock and Home Depot, although holdings can change at any time. Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor, and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.
Brokerage Partners
|
|||||||||||||||||||||||||||||||||||||||||||||||
| Subscribe to our RSS Feed |
© 1996- TheStreet.com, Inc. All rights reserved. |
PODCASTS
