Dow Jones 13363.35 +57.88 5:46 am PDT, September 7, 2007 NASDAQ 2614.32 +0.00 For info, visit access.smallcapnetwork.com S & P 500 1478.55 +0.00 Change your subscription status here Russell 2000 792.92 +0.00 VOLUME 07 : ISSUE 85 Overstock...Undervalued? The Short Squeeze Is On Though I generally try to stick with a small cap trading focus, when I find an investment idea I like outside of the small cap arena I still like to share it with our readers. Hence, today's side trip to officially highlight Overstock.com Inc. (NASDAQ: OSTK). If you're not familiar with the name or what they do, I think the best way to describe Overstock is a hybrid of Amazon.com (NASDAQ: AMZN) and eBay Inc. (NASDAQ: EBAY). Though both of those large cap companies are the leaders in their category, I'm really starting to warm up to the 'close second' opportunity in Overstock.  In a nutshell, I think Overstock (in multiple ways) is a new stock, reflective of the company's transformation over the last twelve months. No, it's not yet perfect, or even profitable. That's ok though. I think we've all seen how stocks are priced at levels the market thinks they'll be worth in the future...not for what they appear to be worth now.  Let's just review the case - the good, bad and ugly - and see if you agree.    The Numbers Behind The Numbers I hadn't looked at Overstock up close in a couple of years. The last I knew, the outfit wasn't profitable, but had managed to develop a pretty powerful web presence (i.e. they could draw web traffic, and generate cash flow).  Then when I looked at the more recent numbers, my first thought was simply "things haven't changed - the company still isn't profitable." However, Overstock is an example of why it can pay to really study the SEC filings.  Though still in the red, I think this company is making bigger strides towards profitability than most folks realize. Sales were actually down last quarter by 6%, coming in at $148.9 million. But, gross margins were actually up for the quarter by 18% - an all-time high. Gross profit ended up being $26.3 million.  Another thing mentioned only in the text of the 10Q filing was the hunt for more suppliers. Overstock recognizes some of their product lines lack depth, and they're going out and finding vendors to fill those holes. They believe this will boost gross sales back up to previous levels, which are already making measurable progress towards a better bottom line.  That wasn't the only footnote in the 10Q though. Year-to-date (the six months ended on June 30th), the operating loss of $31.2 million was a little larger than the $29.7 million loss from the same period a year earlier. But, before anybody chalks up last quarter's strong results to a stroke of luck, also understand there were $12.3 million worth of restructuring charges to be booked. Had it not been for those charges, EBITDA would have been a positive $2.0 million for Q2, and basically a break-even for the year so far.  Point being, a swing to profit may be playing out in the foreseeable future.    The Chart: Rounding The Corner Sometimes it's so easy to get buried in the daily noise and clutter. The media always seems to be saying 'now, now, now', and we can view stocks charts one tick at a time. Maybe that's too much detail. Let's just say I'm glad I bothered to check out OSTK's weekly chart, as it really seems to tell the whole story.  To be blunt, all of 2005 and 2006 was just disastrous for this stock. From $76 to $15 in two years? A lot of companies would never be able to get over such pummeling. That downtrend changed in March though...and pretty decisively. Oh it was small at first, and still seems to be small in the grand scheme of things. However, with shares knocking on the door of $23, I'd say the cat is at least partially out of the bag. I'm a market technician (chart watcher) at heart, but I'm also convinced the best technical signals are also the simplest ones. In OSTK's case, April's cross above the 200 day line was a multi-month first, and did indeed spark something bullish.  The follow-through since then has been respectable too, though not out-of-control. The same goes for volume. I like that. Too often a little upward push just jolts a stock into volatility mode, and it's practically impossible to trade. Here though, I don't see anything close to that. Do you see the other nice part about Overstock? Look at all that room to recover! OSTK was at $75 less than three years ago. The diverging MACD lines on the weekly chart say the momentum is new, and still growing.    Final Thoughts Truth be told, of all the things I found out I liked about OSTK's potential, what got my attention in the first place was the degree of short interest out there. The percentage of shares in the total float that are 'sold short', with investors betting against the stock, is just alarmingly high.  According to handful of data sources, the current short interest is around 36%. Compare that to Amazon's short interest of 11.6%, and eBay's short interest of 3.3%. Wow. And get this.....36% is actually a lot less than where it was a few months ago.  What I think is going on - and I'm not alone - is called a short squeeze. As the price moves upward, anybody who's short the stock gets spooked out of their risky position. They have to 'buy to cover'. That buying, however, only fans the flames of any rally.  Here's the ironic part though...the more 'buying to cover' that's generated, the more likely it is even more 'buying to cover' will be forced. It's a self-sustaining cycle lasting until all the shorts are covered. I have to wonder if by the time it's all said and done, OSTK will be considerably higher than where it is now.  So, let's put the rubber on the road. I think $30.20 is reachable in the near future, but I also suggest a stop-loss level of $20.40. Both are subject to change as time moves on ...particularly the target. If we're still going strong when and if the $30 area is hit, we can talk about raising the bar then.      We Value Your Feedback   Got comments, questions or suggestions? Send 'em on over: Email the Editor If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402 San Diego, CA 92130 Titan Global Puts Revised Revenue Plan in Writing This one is turning out to be one of our hottest stock trading ideas of the year. Titan Global Holdings (OTCBB: TTGL) is up 80% since we first picked it on January 13th, and it seems like every day now we're learning a new reason why it's on a roll. The latest addition to the collection is their 2008 revenue forecast ...they're looking for $747 million in fiscal 2008. Just for comparison, they did about $109 million in fiscal 2006. At that rate, this small-cap stock may be a large-cap stock sooner than you know it.  For all the details, just click here. The news release breaks down all the major pieces of this conglomerate (telecom, PCB, energy, card services, Titan Global brands) into their respective sales potential.  As for the chart, what's not to like if you were in the trade when we first told you about it? Or for that matter, even if you got in when we pounded the table again on August 1st you should still be well up. If you didn't get in, I don't know that now would be the best time. This stock has rallied from $1.05 to about $2.12 in a little less than six weeks ...a virtual hot potato, and deserving of a break. I think the $1.70 area might be a great re-entry point, which would be a 38.2% retracement of the recent move. By the time we got back there, the 20 day moving average will be able to provide some support. On the other hand, I was looking for a pullback a few days ago, and the stock just kept right on going like the Energizer bunny. This time though, it looks really over-extended.  Subscribe Information is power and timely information is profitable. Become informed and profit from Small Cap Network Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. Add your email address below and make sure to check your email inbox and confirm your opt-in request to start receiving the Small Cap Network Email Newsletter on a regular basis. To ensure newsletter delivery, you can add any additional email addresses you may have to the Small Cap Network Member List. Receiving the Small Cap Network Newsletter in multiple locations is the best way of making sure you don't miss the next investing or trading opportunity! For web based email addresses, the Small Cap Network recommends @yahoo.com or @aol.com for timely and reliable email newsletter delivery. 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