Analysis: Short sellers wait to bet big against Groupon

Mon Nov 14, 2011 6:54pm EST
 
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By Alistair Barr

(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.   Continued...