Trade of the Day: Short Groupon - 10/24/13

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Short

Groupon Inc (GRPN) @ $9.45

Thursday, October 24, 2013

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Company Symbol Industry Rating YTD % Gain Target Stop Groupon Inc GRPN Internet Retail 5.2 +99.58% $8.72 $9.86 (cover)
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The Stock Rating indicates the combined score of our proprietary Earning Strength and Company Performance models. The rating scale is 0 - 10 with 10 being the highest. Groupon Inc - Last 30 Days
Groupon Inc - Last 3 Months
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The Trade:

While it's usually not a good idea to fight the tape, there are always some company-specific short opportunities during bull markets. This week, Groupon Inc (GRPN) gave a technical sell signal. For the right price, it is a great short trade.

GRPN is breaking down quickly from a technical perspective. The stock has struggled mightily since hitting highs in mid-September. What looked to be a modest pullback in early-October is now a clear short-term downtrend. GRPN has closed in negative territory for five straight sessions (going on six this morning) and crashed through short-term support around $10.15 on Tuesday. There is gap support dating back to early-August at $9.45, but a dip below that price would likely cause GRPN to slip down to $8.72, where the gap originally opened. Thus, a good spot to enter the short is $9.45 or below.

Taking a look at GRPN on a weekly basis, it is clear that the longer term trend of higher highs and higher lows has clearly been violated, which is never a good sign for an individual stock during a bull market (see picture #2).

There has also been some chatter this week that GRPN's fundamentals could be a risk moving forward. The company is currently overvalued on its Price/Cash Flow and Price/Book metrics relative to its sector's top quintile. While this isn't a huge cause for concern, it certainly doesn't help, especially when analysts start voicing their own concerns. On Tuesday, ITG Investment Research said that GRPN's "August slowdown got worse in September, which has created a risk to estimates." This notion spooked investors ahead of GRPN's conference call on November 7, increasing the severity of the current sell-off.

So, while GRPN certainly could base at $9.45 and establish new support, a dip below this price would be ideal for shorting the stock down to $8.72. The technical picture and fundamental risk are not in GRPN's favor, so we would be sellers of this online coupon retailer despite the broader market's current bull run.

When to Enter the Trade:

Short at $9.45 or below.

When to Exit the Trade:

At a close above $9.86 (Cover) / A close below $8.72 (Profit-Taking)

Company Profile:

Groupon, Inc. (Groupon) is a local e-commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Each day the Company e-mails its subscribers discounted offers for goods and services that are targeted by location and personal preferences. Consumers also access its deals directly through its Websites and mobile applications. The Company operates in two segments: North America, which represents the United States and Canada; and International, which represents the rest of its global operations. Customers purchase Groupons from the Company and redeem them with its merchants. In September 2013, the Company announced the acquisition of last-minute travel app Blink. In September 2013, Groupon Inc announced the acquisition of SideTour.

Disclosure:

At the time of publication the editor and affiliated companies own the following positions: None

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