Why Waiting To Short Groupon Is A Good Idea

Nov. 4.11 | About: Groupon, Inc. (GRPN)

A lot of value investors, like me, believe that Groupon (NASDAQ:GRPN) is extremely overvalued at its current price. However, I wouldn’t be so fast to short shares right after they closed at $26.11 on Friday. Unfortunately, the stock market isn’t perfectly efficient all of the time and Groupon could trade even higher over the next week. In this article, I shed some insight on why bears should wait to go short.

Groupon is valued at $16.6 billion after its first day of trading. Only about $700 million of the company was sold during the IPO, and I believe its very successful first day was driven mostly from supply and demand. Investors want in on new tech stocks, and this is only the third major IPO of the new age tech companies, with the other two being LinkedIn (NYSE:LNKD) and Pandora (NYSE:P). LinkedIn's IPO was very similar to Groupon's in that shares traded much higher than the IPO price. LinkedIn's was more extreme, trading above $90 when the IPO price was only $45. Pandora didn't see this jump, as shares traded below the $16 IPO price in the first few weeks of trading.

The big lesson that investors should take away from the first tech bubble, LinkedIn's IPO, and Pandora's IPO is that it takes a very long time until shares will fall off the table to levels that us value investors would call "fair". Pandora still trades at $15.22 and has seen great performance since its drop to $9.33 in September. LinkedIn still trades above $80, even after its earnings report that drop its price by almost 6 percent on Friday. Many investors who shorted tech stocks during the initial tech bubble were not able to reap the benefits of being right as they had to close their positions because they could not meet their margin calls. Bearish investors should not make the same mistakes with Groupon. With some mutual funds earnings huge gains on their investments in Groupon, the bullish activity may continue.

The one thing I'm sure of with Groupon stock is that it will be volatile. With so many accounting questions and such an unproven business model, I'm very confident that 10 percent swings in the stock over a day of trading will not be uncommon. One play I suggest the bears consider is speculating on Groupon stock volatility with options. Options for Groupon are expected to start selling around November 14th. Purchasing a put and a call of Groupon can protect an investor against the stock continuing to skyrocket, but also yields a high return if the bubble bursts early. Although I'm sure options will be expensive since Groupon volatility is expected by most, it may still be a good investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.