Should You Avoid Overstock.com, Inc. (OSTK)?

Is Overstock.com, Inc. (NASDAQ:OSTK) worth your attention right now? The best stock pickers are getting less bullish. The number of long hedge fund positions stayed the same which is a slightly negative development in our experience

To most market participants, hedge funds are viewed as slow, old financial vehicles of yesteryear. While there are more than 8000 funds trading today, we at Insider Monkey look at the crème de la crème of this group, about 450 funds. Most estimates calculate that this group has its hands on most of the smart money’s total asset base, and by monitoring their highest performing equity investments, we have come up with a number of investment strategies that have historically outpaced Mr. Market. Our small-cap hedge fund strategy outperformed the S&P 500 index by 18 percentage points per year for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have outperformed the S&P 500 index by 23.3 percentage points in 8 months (check out a sample of our picks).

Equally as important, bullish insider trading activity is another way to break down the stock market universe. Just as you’d expect, there are a variety of stimuli for a bullish insider to downsize shares of his or her company, but just one, very clear reason why they would initiate a purchase. Many academic studies have demonstrated the market-beating potential of this tactic if you understand what to do (learn more here).

With these “truths” under our belt, it’s important to take a gander at the recent action regarding Overstock.com, Inc. (NASDAQ:OSTK).

Hedge fund activity in Overstock.com, Inc. (NASDAQ:OSTK)

Heading into Q2, a total of 10 of the hedge funds we track held long positions in this stock, a change of 0% from the previous quarter. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes meaningfully.

When looking at the hedgies we track, Prem Watsa’s Fairfax Financial Holdings had the largest position in Overstock.com, Inc. (NASDAQ:OSTK), worth close to $41.6 million, comprising 1.6% of its total 13F portfolio. Coming in second is Francis Chou of Chou Associates Management, with a $28.5 million position; the fund has 7.5% of its 13F portfolio invested in the stock. Some other hedge funds with similar optimism include Jim Simons’s Renaissance Technologies, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Israel Englander’s Millennium Management.

Since Overstock.com, Inc. (NASDAQ:OSTK) has witnessed a declination in interest from the smart money, logic holds that there lies a certain “tier” of funds who were dropping their entire stakes at the end of the first quarter. Intriguingly, John Overdeck and David Siegel’s Two Sigma Advisors sold off the biggest investment of all the hedgies we watch, valued at close to $0.3 million in stock. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

How are insiders trading Overstock.com, Inc. (NASDAQ:OSTK)?

Insider buying is best served when the primary stock in question has experienced transactions within the past 180 days. Over the latest 180-day time period, Overstock.com, Inc. (NASDAQ:OSTK) has seen zero unique insiders purchasing, and 8 insider sales (see the details of insider trades here).

Let’s also take a look at hedge fund and insider activity in other stocks similar to Overstock.com, Inc. (NASDAQ:OSTK). These stocks are ValueVision Media, Inc. (NASDAQ:VVTV), PC Connection, Inc. (NASDAQ:PCCC), Stamps.com Inc. (NASDAQ:STMP), Vitacost.com, Inc. (NASDAQ:VITC), and E Commerce China Dangdang Inc (ADR) (NYSE:DANG). This group of stocks are the members of the catalog & mail order houses industry and their market caps resemble OSTK’s market cap.