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). 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."
Criticism No. 3: CEO Patrick Byrne Is CrazyOverstock CEO Patrick Byrne is a prime target for critics. Byrne's use of elaborate imagery (e.g., "Sith Lord") and talk of conspiracy have made it easy for critics to lampoon him. While all the criticism generates entertainment for the media, it obscures some serious charges levied against certain hedge funds, such as manipulation of so-called independent research and front-running. ( TheStreet.com and James Cramer were issued
My Trip to Salt Lake CityWhat is the truth about Byrne? Is this 43-year-old Stanford Ph.D. crazy? A couple of weeks ago, on a day Byrne was traveling and out of the office, I flew to Salt Lake City to talk with employees at Overstock, including several members of the senior management team. The ostensible reason for my trip was to discuss the company's model and operations with members of the management team. I also wanted to take the opportunity to quiz everyone that I talked to about working with Byrne on a daily basis.
What Do the Financials Say About Byrne?The financials of Overstock and SEC filings tell you a lot about Byrne. There is no "pro forma" presentation of earnings. It's always been GAAP accounting. This is unusual for a high-growth company. Byrne also refuses to embrace EBITDA as a framework for financial presentation because he considers it misleading.
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