Groupon Inc., which just completed the biggest initial public offering by a U.S. Internet company since Google Inc. sold shares in 2004, is among the most difficult stocks for short sellers to borrow and bet against.
The cost to borrow Groupon shares to short them is rated a 10 by Data Explorers, the most-expensive level on the New York-based research firm’s scale. About 5.5 percent of Groupon’s stocks available for trading are on loan, the data show. That compares with an average of 3.3 percent for the Standard & Poor’s 500 Index.
Strong demand to borrow the stock to bet against it and a small supply of shares available to borrow mean that investors must pay higher fees to bet against Groupon, according to Data Explorers. The shares have jumped 22 percent since the Nov. 3 IPO, when the Chicago-based company raised $700 million selling 35 million shares at $20 each. Groupon sold 5.5 percent of its outstanding shares, fewer than are typically available to investors.
“The cost to borrow the Groupon stock is extraordinarily high,” Mike Shea, managing partner at Direct Access Partners LLC, said in a telephone interview today. “The very limited supply of shares makes it difficult and expensive to both get and stay short for any extended period of time,” he said. “There is a perception out there that this business model is easily duplicated and thus, the valuation is not justified.”
The company is trading at 7.4 times next year’s projected sales of $2.1 billion, which makes it more expensive than Google, Apple Inc. and Amazon.com Inc., according to data compiled by Bloomberg.
Groupon rose 1.6 percent to $24.41 today, giving it a market value of $15.6 billion, higher than the $11.4 billion the company sought in its offering. In a short sale, traders sell borrowed stock on the assumption the price will decline and enable them to profit by buying the shares back at a lower price. The amount of shorting is limited by the willingness of owners to lend and the number of shares available for trading.
“It’s hard and very expensive to short because almost all the shares that can be borrowed are out on loan at the highest fee,” Alex Brog, a London-based spokesman for Data Explorers, said in e-mail.
The limited supply of shares available for trading and borrowing may mean the stock will continue to rise, hurting short sellers who bet on declines, according to Robert Lawton, managing partner at Catoosa Fund LP.
“Crowded shorts are terribly dangerous on the short side as you can get pressed to cover, which only leads to a higher and higher price paid in a short squeeze,” Lawton, whose Los Angeles-based hedge fund doesn’t have a position in Groupon’s stock, wrote in an e-mail today. “I hate the fundamentals, but the short side is way too crowded so I won’t short.”
Short covering occurs when an investor buys a security to close a short position or to return a borrowed security. In a short squeeze, the lack of supply forces prices upward and traders with short positions are forced to buy the securities to cover their positions and limit their losses. The surge of buying results in even higher prices.
As the first daily-deal site to go public, Groupon offers a toehold in a market predicted by BIA/Kelsey to surge almost fivefold to $4.2 billion in 2015 from last year. Expectations for gains allayed concerns over Groupon’s lack of profitability and accelerating rivalry from Google and LivingSocial.
Groupon options haven’t been listed on U.S. options exchanges. Contracts may be created for new stocks as soon as five days after the IPO if the shares meet certain criteria for the stock price and number of shareholders, according to the Options Industry Council, the Chicago-based industry group backed by the U.S. options exchanges.
LinkedIn Corp., which was the first social-media company to go public in the U.S. when it sold shares in May, has a short interest of 45 percent of shares available for trading, according to Data Explorers. The stock has rallied 71 percent from its May 18 IPO. Its cost to borrow is rated 8, the data show.