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The Online Retail Sector Must Be Present in Your Growth Portfolio

Sunday - 6/16/2013, 1:19pm  ET

Economic conditions have been improving globally. The unemployment rate seems to be declining, while consumer confidence readings have been rising. For these reasons, retail stores should fare well in the interim. Overstock.com is an online retailer that has rallied 88% YTD. Even with this performance, I believe the company is still posed for more growth.

The stock that should be in your growth portfolio

Overstock.com trades with a price-to-earnings ratio of 32.91, while the industry’s average is 55.9. Its PEG ratio is 0.96, and its balance sheet does not carry any debt. It operates with ROAs and ROEs above the industry’s average, with an ROA of 12.8, and an ROE of 72.3. Its revenue increased 19% to $312 million for the three months ending in 2013 from last year, and its net income increased 266% to $8 million, or $0.32 per share, from $3 million, or $0.12 per share.

Overall, the company has solid fundamentals, and it should continue to perform well in the future. Although the Internet tax bill passed the senate quickly, Overstock should not lose a significant number of customers to brick-and-mortar retailers. The price tags for items on this website are still much cheaper than brick-and-mortar retailers. Also, the company has been awarded with the 2012 Compuware Best of the Web Gold Award due to excellent service in response time, availability, and consistency. There is a direct relationship between customer satisfaction and the company’s revenue and, ultimately, the stock price. The company is also expanding operations as one more warehouse was incorporated to the business due to high demand for its products. The company must be confident in its revenue-generation ability to add another warehouse, and it should be taken as a strong sign of growth.

Overall, the company should continue to grow, and every dip in the share price may be an opportunity to buy.

Other options to gain exposure to the online retail sector

The online industry is becoming more important each day. Amazon and eBay are two well-established online retailers that also deserve mentioning.

Amazon is one of the big players in the online retail sector. Although the company trades with a negative P/E, and its ROA and ROE are below the industry’s average, the company’s revenue increased 22% to $16 billion for the first quarter of 2013.

The company has supported the Marketplace Fairness Act, even though it will be required to collect sales taxes. Analysts believe this may have a positive impact on Amazon by allowing the company to build warehouses in the U.S. If this happens, shipping costs and delivery times will be reduced significantly, which will attract many customers.

Further, the company’s revenue from its Media section has increased 14% on a year-over-year basis. The company has expanded to other areas such as video streaming. Amazon Instant Video provides the opportunity for customers to rent or buy titles, while Prime Instant Video provides unlimited streaming of thousands of movies and TV shows. The Instant Video competes with the “On Demand” service of Time Warner Cable. Personally, I like this idea because I am against paying for Time Warner's digital cable service just to be able to rent new movies. Prime Instant Video will continue to compete with Netflix, and Amazon's ability to take market share from Netflix will depend directly on the quality of available content.

Overall, Amazon has potential for growth. Amazon’s revenue should not be substantially affected by the Marketplace Fairness Act. Further, the company is diversifying to other sectors, which shows that management has a solid expansion strategy.

eBay is another major player in the business. The company trades with a P/E of 24.6, below the industry’s average. Further, its three-year average revenue growth is 17.3%, above the industry’s average of 7.5. Its revenue increased 14% to $3.74 billion for the three months ending on March 31. Its net income also rose 18% to $677 million, or $0.51 per share, from $570 million, or $0.44 per share.

The company’s outstanding quarter was due to a solid business strategy. The PayPal section continues to deliver strong increases in revenue, with an increase of 18% to $1.5 billion. I believe the company should continue to provide capital appreciation to shareholders via stock repurchase programs. The company’s cash from continuing operations increased 76% to $937 billion, and its free cash flow more than doubled to $638 million for the first quarter of 2013, up from $289 million last year. Investors should expect further stock repurchases in the interim, and perhaps the instatement of a dividend, since the company’s balance sheet does not carry significant debt.

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