It was a classic rematch…
A David v Goliath story, if you will.
On one side of the ring, highly respected, well-paid money managers were betting millions of dollars on the idea that Groupon (GRPN) would continue to sink [By January 2016, more than 80 million shares had been sold short at $2.72 a share].
If those short positions were wrong, investors would eventually be forced to buy the stock back at a higher price, as they covered their shorts.
Millions of dollars of their investors’ money was on the line.
On the other side of the ring, The Cheap Investor put its very reputation on the line by issuing a buy recommendation in the December 2015 issue at $2.79.
We knew that with over $3 billion in revenues, almost $1 billion in cash, and little debt, Groupon had more pros than cons. Understandably, when a company has that much cash and little debt, we can argue for an extremely valuable investment opportunity.
It was also restructuring by closing unprofitable international operations. And, if that restructuring plan returned Groupon to profitability, the stock should do very well.
But by mid-February, the short position was had moved higher, as the stock fell to a low of $2.25.
Short positions foamed at the mouth on anticipation of poor earnings that night.
All seemed lost for us.
Until earnings were released…
Even though the company swung to a Q4 loss of $46.4 million or eight cents a share as compared to a year over year profit of $8.8 million, or a penny a share, it was still good enough to beat Wall Street expectations.
On an adjusted basis, the company would have earned four cents a share.
Revenue was up 3.8% to $917.2 million, as compared to estimates of $846 million.
While we can’t argue that Q4 2015 earnings were good enough to change the market’s overall perception of the stock, they were good enough to force investors into realizing just how severely undervalued the stock had truly become, given its revenues and cash position.
The stock would soar 29% the very next day.
Things got even better for the stock when on February 12, 2016 Chinese e- commerce giant, Alibaba (BABA) reported that it had purchased over 33 million shares or a 5.6% stake in Group for over $130 million. That news sent the stock up over 41%...
Since the recommendation at $2.79, shares have climbed as high as $5.28 for potential gains of 89% in just weeks… Those that were short 80 million shares got a rude awakening.
This is now the third time we’ve done battle with Wall Street over Groupon… and our subscribers have again been victorious.
We’re still not sure why the experts were short 80 million shares at $2.72.
But we saw value where others – responsible for managing your money – did not.
As I’ve long pointed out, we’re not interested in investing in duds that deserve low valuations… only focusing on heavily ignored, revenue-generating stocks that should outperform the markets.
That’s been our CHEAP philosophy for more than 30 years.
With patience, fundamentally sound stocks taken down on fear will recover well. History proves that claim.