Exploring Overstock's Discount

This column was originally published on RealMoney on March 23 at 2:08 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

Negativity makes investors uncomfortable.

A simple way to mitigate this discomfort is to avoid stocks that are enveloped by negativity. The problem with this is opportunity cost. You'll miss out on some extraordinary investment opportunities.

The better way to mitigate negativity is to carefully parse and examine the criticism. That's what I've tried to do in this two-part column on the negativity directed at Overstock (OSTK - commentary - Cramer's Take). Below, I address criticism involving the balance sheet and management.

'Overstock Has a Liquidity Problem'

My review of Overstock's operations indicates that it has ample liquidity. The company has cash and marketable securities of $112 million and credit lines of more than $50 million.

The company should be cash-flow positive this year. Even if it's not, the notable gross-margin expansion in recent quarters makes the likelihood of anything beyond a minimal operating loss quite low. There would be a "liquidity problem" if sales decline in a material way, but there is no evidence to suggest that this is likely.

The fact that liquidity is not currently an issue for Overstock doesn't stop critics from focusing on it. It's easy to couch data in a way that scares unsophisticated investors. For example, a recent column in the New York Post assailed Overstock's liquidity, saying that the company had a "paltry $11 million in net cash."

That metric is accurate -- Overstock has $11 million in net cash, calculated as cash plus marketable securities minus accounts payable -- but that metric is not meaningful. If it is, some of the finest companies in America are in similar trouble.

Wal-Mart (WMT - commentary - Cramer's Take) had a net cash deficit at the end of January of over $14 billion. Dell (DELL - commentary - Cramer's Take) had net cash of negative $782 million as of the end of January. And Costco (COST - commentary - Cramer's Take) runs a net cash deficit quarter after quarter. The net cash calculation is meaningless for a retail model for a variety of reasons, e.g., it does not factor in the value of inventory.

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At time of publication, Alsin and/or ACM was long OSTK, FLWS and WMT, 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.