We've spent the last two weeks moving. That means packing up stuff, moving stuff we never unpacked from the previous move, and selling things we no longer need.
I stumbled across a box of old Beanie Babies acquired over the years in various fashion. Thankfully, we were never part of the craze but did receive gifts over the years. At one time, a few were "worth" quite a few dollars. No longer in "need" for these stuffed creatures, we put them up for sale on various sites.
While scouring the competition, I saw some bears still listed at high prices.
Listed. Not selling.
Yesteryear's value simply isn't there any longer no matter how much an owner wants to sell. This feels like it represents Groupon (GRPN) this week. The company wants to sell itself.
The question we should be asking is if anyone wants to buy it.
Groupon's stock has done nothing for three years. If buyers wanted this name, they could have had it for the same price last year or the year before.
What would make them jump now?
Profitability. That might make a big name like Alphabet (GOOGL) take a roll of the dice on Groupon. The company managed to net $0.03 per share in the first quarter on revenue of $626 million.
Despite revenue being down year-over-year, it exceeded estimates and followed through on the company's plan to maximize gross profit rather than maximizing revenue. This is seen by the 5% rise on gross profit year over year.
Groupon holds $725.9 million in cash and experienced 12-month trailing free cash flow of $83.7 million. Management approved a $300 million buyback plan, so a potential buyer could kill the buyback and likely improve free cash flow through some back-office consolidation.
Would it be a huge boost to the bottom line for a company like Alphabet? Not really.
It would be more like making an investment to earn a return on a huge pile of cash. A large company could run Groupon and yield solid cash flow that could be parlayed into their own buyback, dividend or business investment.
Even if it doesn't find a buyer, Groupon appears to offer a decent risk-reward here. Unfortunately, I don't see a big bidding war, so a $6-7 price target is likely the buyout upside.
I'd prefer to use the elevated implied volatility to sell puts in the name as a long approach.
The Trade:
-- Sell to open GRPN Aug17 $4.50 puts at $0.32.
Net Credit: $32
Max Risk: $418
Max Reward: $32
Breakeven: $4.18
Days Until Expiration: 39
Annualized Cash-Backed Rate of Return: 71.6%
This commentary originally appeared on Real Money Pro at 1:34 p.m. on July 9. Click here to learn about this dynamic market information service for active traders.
