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The Market Is So Over Overstock...But Is It Now Oversold?

Overstock Stock price From June to July, few U.S. stocks were as hot as Overstock.com, Inc. (NASDAQ: OSTK). This month, it's one of the coldest.

Since more than doubling from Memorial Day through National Ice Cream Sandwich Day (August 2nd), Overstock has plunged 30%. A name  traders couldn’t get enough of appears to be one they’ve now had enough of. In its place, telecom providers U.S. Cellular and Telephone & Data Systems have become unlikely momentum winners. 

The online retailer’s wild summer ride has everything to do with its Bed Bath & Beyond rebranding. At the beginning of this month, the “bigger, better beyond” made its U.S. debut offering a wide assortment of home furnishings and deals. Mobile app coupons offering up to 25% have replaced the paper coupons that long frequented American mailboxes. Attempts to visit overstock.com will only get you rerouted to bedbathandbeyond.com.

The much anticipated makeover is complete; a new chapter begins for Overstock (or whatever we’re supposed to call it). It is one filled with hopes that a more recognizable Bed Bath & Beyond banner will bring stronger sales, cost-saving synergies and a return to profitability. In the immediate term, though, high prices and credit card rates are likely to keep spending on comforters, air fryers and area rugs in check — a much-needed reality check for OSTK shareholders.

As the rebranding buzz turns into a hangover, investors must decide whether or not the recent Bed Bath euphoria goes beyond a short-term rally. With Overstock’s first post-buyout report still two months away, there is a lot of time for this execution story to play out. 

Does Overstock Have Good Fundamentals?

Despite the market’s early credit, it’s way too early to know if Overstock’s Bed Bath & Beyond pivot will be successful. Even in a healthier retail environment, the company will have to win over consumers who have more choices than ever when it comes to buying furniture online. Williams-Sonoma, Wayfair, RH, Arhaus and a bunch of smaller players are all competing for the same dollars. Not to mention Amazon, Walmart and a host of big-box e-tailers.

Catering to average or below average income households may be Overstock's lane, but can it provide value and generate profit growth at the same time?

For now, all investors can do is speculate and evaluate the company based on its past execution. Recent results haven’t been pretty. Sales were down 30%, and profits were down 76% in 2022. In the first half of this year, sales are lower by 25%, and net losses are mounting. Based on consensus estimates, profits won’t be booked until at least 2025. 

Wall Street has been cautious about putting the cart before the horse. While the Bed Bath rebrand has received praise, the stock hasn’t received an upgrade since the acquisition news. And with a ton of uncertainty surrounding it, analyst price targets range from $19 to $87. What is certain — OSTK will remain volatile.

As fundamental purists would ask, why invest in an unprofitable business in the highly competitive home furnishings space? Especially when established incumbents like Williams-Sonoma and Arhaus can be had at just 9x earnings.

The truth is, this isn’t a stock for fundamental investors. Absent signs of consumer traction and a clear path to profits, OSTK is better suited for short-term swing traders seeking to capitalize on the next big headline and market overreactions. 

What Do The Technicals Say About Overstock?

With this said, OSTK does look oversold here. A 15.5 relative strength indicator (RSI) reading puts it in the bottom quintile of Nasdaq Composite stocks. This doesn't guarantee a reversal, but historically when OSTK’s RSI has fallen below 20, buyers swoop in. It has happened on three occasions over the last 12 months, and each time, a mini-rally ensued.

The fact that trading volume has been relatively muted on the downslope is also an encouraging sign for a potential bounce. High volume jumps led the stock to almost $40, but the ride back to the $20's has been calm. This suggests most newfound OSTK bulls are in for the long haul. 

Last month, a 50-day/200-day ‘golden cross’ unfolded on OSTK’s chart, an event 18 months in the making. When this happened three years ago, the stock skyrocketed to a record high of $128.50. An e-commerce boom and euphoric retail trading are unlikely catalysts this time around, but if the bullish crossover holds true, OSTK could be at the beginning of a long-term uptrend. Everything is riding on the rebirth of Bed Bath & Beyond.

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