Berkshire Ruminations

Thursday, May 11, 2006

Overstock CEO Loco

I bought a few years back and doubled my money in about three months. I bailed immediately because I could tell the sudden runup in price was not justified. Boy am I glad I did, because to agonize over what is going on at that company today is more that I am willing to undertake.

What originally attracted me to the stock was the legitimate Buffettness of it. The now-loco CEO Patrick Byrne is the son of Jack Byrne, the longtime head of GEICO and close friend of Mr. Buffett’s. The company seemed to be managed in a Berkshire type fashion, complete with an owners’ manual and straightforward, from-the-hip commentary from the management. It also seemed to be reasonably cheap. Although it wasn’t profitable, it was gaining ground quickly and was considerably cheaper than its closest peer, on a price-to-revenue basis.

Well, it now seems that all those good things mentioned above have dissolved, except for Patrick still being Jack Byrne’s son – so far as I know he hasn’t disowned him yet.

I am sure it started earlier in life, but Patrick Byrne’s hysteria culminated last year in his “jihad” against naked shortsellers. Yes, he actually called it jihad. Shortsellers severely depressed the price of overstock stock, he said, and did so through the unethical and often illegal practice of naked-shorting. This means the shares that were being shorted were not even borrowed – they didn’t exist at all. Apparently this is possible because of structural inefficiencies in the stock exchanges. It is not something that I really understand, nor have any desire to understand to the extent that I would want to do such a thing myself.

So the stock price crashes, and Patrick was probably somewhat correct as to why. But his response was just, well, crazy. I mean really crazy, crazy in a Tom Cruise crazy kind of way. Instead of welcoming the drop in price as an opportunity to buy shares for himself, or better yet for his company, he sued one of the firms accused of the naked shorting. In fact, he did buy quite a few shares for himself, so why is he whining? He then announces that he is declaring “jihad” against them, claiming that the crash in overstock stock was caused not just by naked shortselling, but by a conspiracy coordinated by the "Sith Lord." Ok, Pat, now you are starting to lose me.

In an interview in December, he was able to divert conversation away from Overstock's disappointing holiday sales by suggesting he had, among other things, herion and a dead body in the trunk of his car. Later in that interview he verbally attacked Mark Cuban, who successfully shorted Overstock shares.

In March Patrick issued a press release entitled “ to Gradient Analytics and Rocker Partners: Where's the Countersuit You Threatened?”, the text of which is hilariously unprofessional.

Today, he released a press release reading “ Celebrates Receipt of SEC Subpoena.” I can’t help but think that such a preoccupation with such an inconsequential problem can’t be good for the company.

Moreover, blaming others for a fall in your own stock price, no matter how justified, is just tacky. Did it not occur to Patrick that, despite escalating sales, earnings remained negative? Is it not possible that folks were just losing faith in the prospects of the company? If he were truly to follow in his father’s footsteps, Pat Byrne would either brush off the stock’s fall and start buying, or own up to his failure to put up better numbers – since better numbers logically would serve to dissuade short sellers anyway.


  • This story is very similiar to Biovail's (BVF), which was chronicled about a month ago, maybe 6 weeks ago, on 60 Minutes - although the CEO is not nearly as deranged as OSTK's. BVF blames the short-sellers (hedge funds) for all the company's stock price problems dating back to 2003 and a few independent research companies; they particulary targeted Steven Cohen's SAC Capital Partners as the culprit - not BVF's failures. The BIG difference is that BVF has seemingly put the problems behind it as the stock has had a substanial run-up over the past 12 months and up about 8% since the 60 Minutes piece.

    By Blogger mike, at 14 May, 2006 15:14  

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