Pulling Back from Resistance

September 04, 2013, 09:16 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Groupon Inc’s (NASDAQ:GRPN) stock struggled after its initial public offering in late 2011, as the stock was down about 85% a year after going public. However, the stock is up over 90% YTD, and the company continues to maintain its lead in the crowded daily deal business space. Let’s take a look at Groupon, and see why you might want to buy, sell or hold it.

In early August, Groupon stock jumped 25% after beating second quarter revenue estimates on the back of strong North American growth. The company also announced a $300 million share buyback, and also said that Eric Lefkofsky would be its new full-time CEO. Although, Groupon is not currently profitable, the company has delivered a one-year EPS growth rate of 89%. After two consecutive quarters of beating expectations, the company is starting to show some stability, which has not been seen since the IPO in 2011. The stock hit a new yearly high after earnings, but pulled back after failing to break above long-term resistance.

Groupon still might be in the early stages of its turnaround, as the company continues to benefit from two powerful e-commerce trends, local and mobile. Almost 50% of its business in North America comes from mobile, and over 50 million people have downloaded Groupon apps worldwide. The company has done a good job of fending off smaller start-ups, and even the social networking giant Facebook Inc (NASDAQ:FB) who made an attempt at daily deals a couple of years ago.

Amazon.com, Inc’s (NASDAQ:AMZN) Local is just starting to make progress in daily deals, and the giant online retailer might be the best platform to challenge Groupon going forward. Amazon’s lightning deals, offered on its website, are similar to Groupon's daily deals. Amazon teamed up with LivingSocial in 2011, another daily deals company, which offers discounted products in Europe, Australia and North America.

New competition has slowed the daily deals business for Groupon, but the company is making progress with its other business unit, Groupon Goods, which sells physical goods. Groupon is considering creating a warehouse network for its physical goods business, which would place the company into more direct competition with Amazon.com. In order compete with Amazon and eBay Inc (NASDAQ:EBAY), the company will need to operate with low margins and offer expensive incentives, such as free shipping. The Goods unit constituted $242 million of the company’s latest quarterly sales of $609 million, or about 40% of total revenue.

Groupon managed to put together a couple of positive quarters, and it appears to have stabilized its business, which is positive for long- term investors too. However, the stock tested resistance in early August, and pulled back. By definition, by rule, we should expect declines to support after resistance is tested, and resistance was tested in Groupon most recently, but not recently enough to constitute taking action right now.  By the rules that govern the strategies at Stock Traders Daily, we sell and short when stocks hit resistance and we expect declines to our stated support levels afterwards, so although our combined analysis for GRPN tells us to expect lower levels, we would not initiate new trades at these levels because the stock is in the middle of its channel.  When stocks fall back from resistance that increases the risk associated with the trade; we use inflection points to govern entry levels, which in turn govern our risk controls, so the closer we trade to them the tighter our risk controls can be.  GRPN has pulled back far enough to dissuade new short positions.

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