Is Groupon the Next Near-Death Stock to Rally?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the last year alone we have seen a number of near-death stocks rally and post large gains. It seems almost apparent that investors have been buying these stocks as some of the large cap companies have become too expensive in comparison to growth. The newest stock that could join the list is Groupon (NASDAQ: GRPN), which saw major movement on Friday. However, the question that remains is will it see this level of momentum and are the similarities present?
Near-Death Stocks Show Life
What we’ve witnessed over the last year are beat-down stocks that have rallied following one major key development. The catalyst doesn’t even have to be significant, just enough to entice movement and create some excitement, causing a short squeeze.
The most noted near-death stock to rally has most likely been Nokia (NYSE: NOK). On July 19 the stock bottomed following a 95% loss over the previous five years. As a result, it made sense that at some point the stock would find a bottom, and since July 19 it has rallied over 120%. At that time it was simply bouncing off the bottom, but in the last month it has been excitement for the company’s Lumia 920T that has created the movement.
The truth of the matter is that we don’t even know if Nokia’s new Lumia phone will be successful, it’s just speculation. The same can be said for Research in Motion (NASDAQ: BBRY), its stock has nearly doubled from its low after a 90% fall from 2008. Investors have been optimistic about the prospects of its new Blackberry 10, despite no proof that it will be successful.
Then, there are companies such as Netflix (NASDAQ: NFLX) and Green Mountain Coffee Roasters (NASDAQ: GMCR) that fell for speculation, but are now showing signs of life. Netflix is actually positive for the year, and has seen a major boost in the recent week after a licensing deal with Disney. Now investors believe it has a clear advantage over the competition. Green Mountain fell due to potential operational concerns and problems with patents. However, the stock has more than doubled from its low on a re-emergence of hope and upside.
Is Groupon the Next to Rally?
So is Groupon the next to follow in the footsteps of companies such as those above and others like First Solar? The company would first need excessive loss, which I believe its 82% post IPO loss provides. Then, it would need deep fundamental value. Its 1.14 price/sales and forward P/E ratio of 19.52 might not look like deep value, but actually is if compared with other social media internet based companies. Finally, it would need a catalyst, or something to entice optimistic speculation.
The catalyst is what I struggle with in regards to Groupon. But then again, I also struggle with a catalyst for Nokia or RIMM. Perhaps Groupon’s near 23% gain on rumors of a potential takeover bid from Google is the needed catalyst to reverse the trend, and lead buyers back to its stock.
In addition to a potential takeover, the company has seen a significant shakeup of its management, and has begun to roll-out a few new services including physical locations for the Groupon experience. Recently, long-term bear Ken Sena of Evercore raised his price-target and has become less bearish. Sena stated that he believes the company’s Groupon Goods e-commerce sales could grow to $2.5 billion in 2013 from $1 billion this year. Therefore, if this segment becomes the next segment of aggressive growth then it is very possible that Groupon could become the next near-death stock to rally.
I think it is important for me to reiterate that I by no means believe that Groupon is a good company, or a long-term investment. However, we must follow the trends of the market, and a Groupon rally is very possible due to it looking very similar to other near-death rallies over the last year. The key moving forward will be speculation of a takeover, much like speculation surrounding Nokia’s Lumia and RIMM’s Blackberry 10. And if the company’s e-commerce sales can grow at a 150% year-over-year rate then it might just have the catalyst and value presented to see significant gains in this wildly unpredictable market.
BrianNichols has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Green Mountain Coffee Roasters and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!