Long Groupon

Yup I said it. To my knowledge, I am the only person out there who has said it - the coverage of GRPN in the blogosphere is universally bearish.

Not only that, but all of the available supply of securities have been sold short at very high lease rates (here - technically in order to go short you have to locate someone who is long and pay them an annual return for the privilege of shorting their stock).

Additionally, I hate this stock. They are spending way too much to add customers, their business model is easily replicable (which means that margins will inevitably shrink), and their valuation bakes in growth rates which I consider an impossibility.

So how do I end up recommending a long position? For one, assuming that no other investors are willing to lend out their shares, there will be no more selling pressure from the shorts (as well as a non-negligible risk of a short squeeze). Two, I don't think there will be immediate clarity on the strength of the bearish arguments - it will take a couple of quarters of reporting for the market to reach a consensus. In this period, I expect significant volatility in the stock's price.

Finally, the nature of my long position is important. I purchased a very small amount (1% of capital) of July 2012 $30 calls this Monday for $1.10 apiece (mid-price is currently $1.70). The skew in pricing between puts and calls was pretty outrageous - at the time similarly out-of-the-money puts were trading for about 4.5X the price, tilting the odds in my favour. This position exposes me to asymmetric payoffs: a small loss if the stock falls (the most likely scenario) and a large profit if the stock defies gravity and rises.

In sum, my thinking here is that this stock will experience considerable volatility over the next few months (look at LinkedIn's price history for a guide). As a result, there is a considerable probability that Groupon could appreciate from here. Even if this move is only short-lived, my options will move in a similar direction. Timing the exit from this trade will be difficult, and there is a considerable probability that I end up holding the options as they expire worthless. However, due to the asymmetrical payoffs of this trade, I consider this a positive expected value situation.

Disclosure: I am long July 2012 $30 calls. I also went short AMZN via Jan 2012 $200 put options after they failed the retest of resistance at $220 yesterday - see previous post here.

BAA II

Bad Asset Allocation: more tech.

Amazon is one of the few original dot-com companies that actually became a viable business. That being said, this stock is massively overvalued. Trading at 112X trailing earnings, this stock is priced like a small cap hyper-growth stock. The only problem is at this size, it can't grow like a hyper-growth stock, leaving it with a PEG of 7.While I do love Amazon (I buy pretty much all of my books there), this valuation cannot last. They have less than $1B earnings propping up a $100B market cap - absurd, and their forecast for Q4 earnings is -$200M to $250M.

Historically, shorts in this stock have been crused. I am still unsure when to put on my short, but am looking for a good entry point. I will let you know when I find one.

Disclosure: I am not presently short AMZN, but may initiate a position in the next 72 hours.

RIMM: BP 2010 Redux?

Totally different industries, headquarters an ocean apart, and stocks plagued by completely opposed idiosyncratic factors.  So what, pray you, do these stocks have in common?

I don't blame you for asking yourself this question after reading the title of this entry, but bear with me - it may well be worth your while. As I am sure you all remember, BP's Macondo well blew out in late April 2010 and leaked uncontrolled throughout the summer, in what turned out to be the largest oil spill in history. To no one's surprise, BP's stock was pummelled as a result. However, its price performance over the course of the disaster was somewhat surprising in that it levitated in early Q3, even as the disaster dragged on without a solution in sight - see chart.

So what happened here? I recall quite clearly that there was no news justifying a 30% appreciation during the month of July. Therefore, it appears to me that institutional investors dumped this stock ahead of quarter-end, anticipating having to present fund holding to investors and not wanting to have to defend holding this environment-trampling dog of a firm. As we transitioned into Q3, the sellers were exhausted and investors who had done their homework and did not face the same transparency requirements (read: hedge funds) stepped in and began snapping up this stock, which proceeded to return 30% over the next month.

Now let's have a look at RIMM's chart: 

So now it's my turn to pose a question: Who's will be left to sell heading into Q3? With a forward CFO yield of nearly 25% (based on the firm's reduced guidance), it appears that there is upside potential here (admittedly not as large as in the case of BP).  Therefore, a long position with a tight stop strikes me as a trade with an attractive risk-reward ratio.

Clearly there are very important differences between BP in 2010 and RIMM today. The former was a company with a strong core business which had a massive NPV-negative event, while the latter's massive NPV-negative event was weakness forecast in its core business.  I am not here to claim that RIMM is a strong long-term investment - that depends on whether Mr. Balsillie & Co. manage to right the ship. However, I do think that there is a good short term trading opportunity here for a10-20% upside.

Disclosure: I went long RIMM today.