Like Al Pacino said in the Godfather, "it's not personal, only business."
As far as I'm concerned, that's how investors should act with stocks. Falling in love with any stock will eventually get you in trouble, even if it has worked out for you till now. Eventually the market will take back all your gains and then some.
As a reminder, I recommended buying Groupon (GRPN) below the $3 level back in November 2012 (please consider: Groupon Finally Lands On Planet Earth). My logic at the time was that the coupon business was not going anywhere, and you were essentially buying Groupon for its cash. Even if everyone thought the company was a goner, I thought the risk reward probabilities -- based on the valuation of the company -- were in our favor.
Since then there has been a management shakeout and the company is venturing in payment systems and seems to have gotten its act together. The stock since then has rallied by almost 300% since the November 2012 lows.
The question is, is Groupon worth almost quadrupling since my recommendation back then? The answer is no. While the company is doing many interesting things at the moment, in reality not much has changed since November of 2012, except for market expectations. Back then the market was not expecting anything to happen; today the market is expecting the world of the company.
Putting aside the fundamental argument for now (fellow SA contributors Bill Maurer and George Ronan did a good job of that recently, and I don't have much to add), there are two elements that investors should take into account recently that might mean that Groupon's rally has reached an end, primarily on valuation concerns.
The first is that Tiger Global Management LLC, a major institutional holder of Groupon's stock, recently sold 72% of its position. Anytime a major holder sells that much of a position, most likely it means they don't see much more upside. And personally I share this opinion also.
The second item is something that is probably not that apparent, unless you look at Groupon's chart. Please recall what I said a while ago concerning Nokia (NOK) (please consider: Nokia: Buying The Dips).
In all my years of investing, I have noticed that big spikes in volume happen either close to new highs or new lows. New highs are usually accompanied by good news, which the smart money knows can't last forever and sells, while those that don't have any insight buy, because they see pie in the sky.
The opposite is true on the dips. People think the sky is falling and sell the kitchen sink -- like they are doing these days with BlackBerry (BBRY) -- while the smart money evaluates the opportunity (if it exists) and does the buying.
Now let me show you Groupon's chart below.
As you can see from the chart above, the first three big spikes in volume happened on dips. The smart money seeing through the daily noise at the time, decided (correctly so) that no matter what the news was that made investors dump Groupon, it was an opportunity to buy.
However look at the chart recently, when the stock reached $11. What I see is the smart money dumping the stock. Remember, big volumes happen on the dips or at new highs. As far as I'm concerned, the chart is telling me that the smart money is selling this stock left and right.
On the one hand we have evidence of institutional selling and on the other, we have evidence of smart money selling on the charts. While I like the company, I think that the current valuation of Groupon does not offer much more upside from these levels. I would be a buyer if either the stock corrects, or if the fundamentals warrant higher prices, which they do not at the current time.
Coupled with the fact that we have evidence of smart money selling, I think you should sell also.