32 BARRON’S August 3, 2020
B
rad Safalow’s investment
ideas have beaten the mar-
ket by a handy margin in
the 10 years he has run
his subscription service,
PAA Research. The name
stands for “please act
accordingly,” and clients who followed
his stock recommendations would have
outperformed the market by 50% on
his longs and 30% on his shorts since
2010. That’s remarkable, given the
strength of the past decade’s bull mar-
ket and the fact that the majority of
Safalow’s ideas are shorts.
The 44-year-old analyst hung out
his shingle after stints at JPMorgan
and a long-short hedge fund. His clien-
tele is largely institutional, and he sup-
plies it with ideas on a variety of small
and midsize companies. Early last
decade, Safalow warned clients ahead
of the collapse of the for-profit educa-
tion industry. He spared attentive sub-
scribers from the disappointments of
online jeweler Blue Nile and discount
retailer Big Lots. And he was long,
then short, real estate websiteZillow
Groupat opportune times. We
checked in with Safalow by phone at
his home in Marietta, Ga. An edited
version of our conversation follows.
Barron’s: How’s this year going?
Brad Safalow: It has been a difficult
year for short sellers, particularly any-
one shorting the growth-stock sector.
Tell us about some longs, then.
Let’s start withOverstock.com
[ticker: OSTK]. Institutionally, it is
not a widely followed name. There’s
virtually no coverage.
Its controversial founder, Patrick
Byrne, left last year.
Yes, there’s a lot of history. The big
change has been the new manage-
ment team. CEO Jonathan Johnson
deserves an extraordinary amount of
credit for stabilizing the company
and refocusing on its core market in
the home-goods space.
Overstock has one of the five larg-
est e-commerce platforms in the U.S.
in home goods and home furnishings.
Since the outbreak of Covid-19, they’ve
been generating phenomenal, 100%-
plus revenue growth, year on year.
They were one of three companies
to be awarded a contract to be an e-
commerce portal for the federal Gen-
eral Services Administration, which
will be a $6 billion opportunity. I
think the company will generate $2
billion in revenue this year, and much
more as the GSA contract ramps up.
Since you recommended it at $15,
thestockhasmovedto$76.Howdo
you value the e-commerce piece?
Overstock trades at about one times
revenue, even though the company
has a much better track record of prof-
itability and cash-flow generation than
competitors likeWayfair[W]. If you
put a 1½ to two times multiple on
their retail revenues, that would imply
$75 a share of value for the stock.
And we haven’t talked yet about
their Medici Ventures portfolio of
blockchain-based technology
companies—the jewel of which is a
company called tZERO. It’s a broker-
dealer that will enable the trading of
digital securities, also known as
Security Token Offerings, or STOs.
They just announced that they’re
going to start trading an STO associ-
ated with the St. Regis Hotel in Aspen,
Colo. You could apply that same rubric
to financing videogames, films, drug
development, or companies in private
equity or venture-capital portfolios.
tZERO will get underwriting fees, then
trading revenue and listing fees. This is
a multibillion-dollar opportunity.
How do you value tZERO?
My base case would suggest a value
of $300 million for tZERO, which is
worth around $7.50 per Overstock
share. The upside scenario is a billion,
Photograph byMELISSA GOLDEN which would be $25 a share.
Q&A
An Interview With Brad Safalow
Founder, PAA Research
2 Picks and
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A Savvy Pro