The following is an excerpt from Alistair Barr | November 14, 2011 | Reuters.com
(Reuters) – On paper, Groupon Inc appears to be a juicy target for short sellers: it loses money, it has changed its accounting twice, and its unproven business model faces competition from Google and Amazon.
But the shorts may have to wait as betting against the daily deals website is just too expensive right now because of its tiny share float.
To make money shorting the $15 billion company, which went public earlier this month, investors would have to see the stock go close to zero for a year-long bet.
“It would be very premature and highly risky to consider shorting Groupon soon after the IPO,” said Fred Moran, an analyst at Benchmark Co. “It’s very difficult to borrow the stock on a newly issued security and it has a very low float.”
Groupon sold a stake of about 6 percent in its initial public offering, one of the smallest in the past decade.
That means there is little stock available for short sellers, who have to borrow shares before they can sell them. If the stock drops, they can buy it back at a lower price, return them to the lender and pocket the difference as profit.
A scarce supply had some brokers charging an annual rate of 90 percent to 100 percent last week to borrow Groupon stock, according to two hedge fund managers, one independent trader and one prime broker. They spoke on condition of anonymity to preserve their counterparty relationships.
It is unusual for a stock to cost this much to borrow. Shares of the heavily shorted Eastman Kodak, for example, cost 73 percent to borrow on average over the past seven days, according to Quadriserv AQS, which runs a securities lending platform.
A 100 percent rate, or negative rebate as it is known, means a trader has to pay $20 to borrow a $20 stock for a year. In this instance, Groupon stock would have to drop to close to zero within a year for a short seller to break even. So traders are only shorting the shares for very short periods, such as a few hours, or avoiding the trade all together.
“I’m not looking at it yet because of the borrow and float,” said Jeff Matthews of hedge fund firm Ram Partners, which takes long and short positions. “Also, they have some smart guys there. It could become a legit business, although I doubt it. So waiting and watching.”
Groupon’s small float increases the chance of a short squeeze, which happens when a stock climbs and short sellers are forced to buy back shares to limit losses or close positions. Such buying often feeds on itself, pushing the price even higher and forcing other shorts to buy and cover.
Andrew Left of Citron Research compared the risk of shorting Groupon to betting against LinkedIn Corp, the professional networking website that went public in May, also with a float of less than 10 percent.
LinkedIn more than doubled on its first day of trade, then gave up a lot of those gains over the next month, only to jump about 75 percent by the middle of July. Such swings can leave short sellers nursing heavy losses.
Groupon may be an attractive short at some point, but “right now it could go higher too easily,” Left said.
He added, “The stock market is a game of supply and demand, not fair when there is no float.”
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