On the Rationale for the Overstock Post
Below, you will see yesterday’s post in which I argued Overstock.com (OSTK) is worth at least $1.5 billion. Why would I ever slap an exact figure on any company? Isn’t publicly placing an exact value on a business (especially an unprofitable and controversial business like Overstock) the absolute height of arrogance? Well, I don’t know if it’s the absolute height of arrogance, but it does come pretty close. So, what was I thinking when I threw out that $1.5 billion figure?
First of all, I was not literally suggesting Overstock is worth $1.5 billion. I was trying to get away from the soft commentary, opinion, and unfocused analysis which usually surround any such stock. I wanted to put the stock price away, and ask: what is Overstock (the business) worth? To do this, I laid out some simple, (and I believe) conservative assumptions regarding the company’s future. Working from these assumptions, I arrived at an intrinsic value of $1.5 billion. These assumptions were not intended to be the most accurate projections. They were intended to be the most useful analytical tools.
My aim was to give those few investors who find Overstock to be suitable on qualitative grounds an opportunity to see just how cheap the stock is quantitatively. I couldn’t adequately demonstrate Overstock’s cheapness by words alone; nor, did I believe a simple reference to the company’s price – to – sales ratio would suffice. As you can see from the earlier post, if you believe Overstock’s business strategy is viable, it is nearly impossible to make a case against investing in the company. I welcome suggestions on how to tweak the assumptions if you believe they are too optimistic. However, I sincerely doubt any reasonable adjustments will lead to a different conclusion.
If Overstock is a viable business; then, its stock is a bargain. Establishing this simple, logical argument was the real purpose of the four assumptions detailed in the earlier post. I hoped that by putting a floor on what Overstock was worth as a viable business, it would be possible to move towards more definitive, more concrete, and ultimately more useful judgments about the stock as a potential investment.
The impetus for the Overstock post was a series of intrinsic value analyses I did over the weekend. These were just the first step in a more detailed evaluation of twelve businesses which looked, at least upon first impression, to have a real chance of being undervalued.
For those interested in doing their own intrinsic value analyses, the twelve companies were: Energizer Holdings (ENR), Yankee Candle Company (YCC), Clorox (CLX), Blyth (BTH), Posco (PKX), Lenox (LNX), Timberland (TBL), Journal Register Company (JRC), Jakks Pacific (JAKK), Rent – A – Center (RCII), John H. Harland (JH), and Overstock.com (OSTK).
If you really like this kind of work, you might be interested to know that while my analysis for most of these companies suggested a margin of safety less than Overstock’s (67%), I figured one of these twelve stocks is currently selling at about the same discount to its intrinsic value as Overstock. Which one is it?
Please feel free to provide your own analysis of one, some, or all of these stocks by clicking the comments link below.
I also encourage you to read the original post: “On Overstock” if you haven't already.
Happy Hunting