Overstock Paddles the Amazon

This column was originally published on RealMoney on May 17 at 1:50 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Long-term value investors have a distinct advantage over the short-sellers of Overstock(OSTK Quote). That is, value investors can "buy and hold" this stock and ignore the naysayers.

Short-sellers have no such luxury. It doesn't make sense to "short and hold" Overstock for a couple of reasons.

First, because of lax rule enforcement and woeful internal market controls, there are already twice as many shares sold short (9 million) than are lendable (4.5 million). By my estimation, about 70% of Overstock shares have been certificated or are in the process of being certificated, making short positions problematic.

The second reason not to take a short-and-hold position in Overstock is because the stock is dramatically undervalued. This stock has significant multibagger potential as it grows toward profitability.

Wall Street has an analytical blind spot when it comes to identifying changes in profitability. It's a result of the linear bias of analysts, namely, that what happened yesterday will happen tomorrow.

Because of this blind spot, huge valuation adjustments are accorded online retailers as they morph from unprofitable to profitable. Shares of Amazon(AMZN Quote) soared 700% from late 2001 to 2003 when that company became profitable.

Shares of Netflix(NFLX Quote) also scored a seven-bagger in a short time as the company became profitable.

At their lows, Amazon traded at 75% of sales and Netflix traded at 60% of sales. Currently, Overstock trades at slightly less than 50% of sales.

Investors Have to See Through the Negativity

Only a bold and courageous investor will secure the multibagger opportunity in Overstock. That's because companies don't sell at a fraction of their value unless they are enveloped by negativity, and negativity abounds when it comes to Overstock.

Staying with the Amazon corollary, look at the negative commentary below that enveloped that company in 2001. What is startling is that this is virtually an exact copy of the negative commentary currently directed toward Overstock. As I've noted in an earlier column, the evolution of Overstock's operating model is remarkably similar to Amazon's.