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Tickers in this Article: ostk, amzn, wmt, ndaq
John Byrne, the Chairman of Overstock.com (OSTK) and father of company CEO Patrick Byrne, announced Thursday that he may step down from his post in protest to the "jihad," that his son has been waging. Patrick Byrne has been fighting any and all critics of the company, including short sellers. On several occasions, the CEO has even referred to a "Sith Lord," as the head of an al-Qaeda like organization of naked short sellers responsible for the poor share performance that has plagued the company. Since reaching all-time highs in late 2004 shares have fallen 70%. The large drop prompts the question of how responsible these alleged naked short-sellers are for the company's perils and whether or not they should be a major focus for the head of the company.

A naked short sale, as defined by the SEC, is a short sale in which the seller does not borrow or arrange the borrowing of shares to be delivered to the buyer, resulting in a failure to deliver. If more than 0.5% of a company's total outstanding shares or a total of 10,000 shares have failed to be delivered within three days of the sale, a sign of naked shorting, the company shows up on the Regulation SHO threshold list. Overstock has been on this list since April 2005, which gives the indication that Patrick Byrne at least has some basis for his argument but its overall effect and importance is in question.

As of February 10, 83% of Overstock's float was short sold, making it one of the most heavily shorted companies on the Nasdaq (NDAQ). This large short selling pressure indicates a large demand for shares to be borrowed and short sold, leading to difficulties in acquiring the necessary shares to be borrowed. The Depository Trust & Clearing Corporation has stated when examining their list of fails that 85% of fails are solved in 10 business days and 90% are solved in 20 days. So the reason for Overstock being on the threshold list could simply be that a high demand for shares to be borrowed has caused a weakening supply of shares to be borrowed, causing enough delivery delays to meet the requisites (approx. 97,000 shares, or 0.5% of
Overstock's outstanding shares) of the threshold list.

However, it is the underlying reason for the demand to short sell that Patrick Byrne should be concerned about. And to put it simply, this underlying reason is the poor financial performance that the company has had since going public in 2002. Since their IPO, the internet retailer has never had a profitable year, losing an average of $0.80 per share a year or a total of $54M over the four years. This is disappointing, as the company has grown their revenues rapidly, up 63% in 2005, but can't manage profitability, as costs are rising as quickly if not more so each year. To make matters worse, the company has forecasted slower growth in 2006 along with increasing competition from the likes of Amazon (AMZN) and Wal-Mart (WMT), who are increasing their presence on the net.

So as the company racked up continued losses and disappointments in 2005, it is not much of a stretch to find justification for short selling, especially after shares had risen 340% from the time of the IPO in 2002 to late 2004, valuing the company at $1.4B. The easiest way to remove this justification would be to turn a profit, and the only way that this is going to happen is that if Patrick Byrne focuses completely on the task. So for the benefit of shareholders, heed the advice of your father and spend more time on creating profitability instead of that elusive "Sith Lord," as you only have so much time each day.

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