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Groupon Doesn't Look Like a Deal to Fund Managers

They're not exactly treating it like Google.

Greg Carlson, 04/09/2012

Five months have passed since Groupon's GRPN initial public offering. It's clearly been a bumpy ride lately: After an initial surge and a succession of dips and spikes, the stock has declined steadily since early February. Amid concerns about the company's accounting, downward revisions of its revenue, and slowing growth, Groupon's price has dropped to under $15 per share from more than $24. Morningstar stock analysts have stated the company's been overvalued since the date of its IPO.

Mutual funds haven't shown a tremendous amount of enthusiasm about Groupon from the outset compared with other notable IPOs in the past. True, access to the shares has been limited as the company has sold just a small percentage of itself through the stock. But even the smaller funds haven't exactly been loading up on Groupon. Thus far, no nonleveraged equity fund has invested more than 2.5% of its assets in the stock. The biggest holders so far, by percentage of assets, have been rather sizable growth funds run by successful veteran skipper Dennis Lynch: The $7.3 billion Morgan Stanley Institutional Mid Cap Growth MPEGX had 2.2% of its assets in Groupon at the end of 2011, and three other Lynch charges-- Morgan Stanley Focus Growth AMOAX, Morgan Stanley Multi Cap Growth CPOAX, and Transamerica Capital Growth IALAX--had 1.4%-2.5% stakes.

Beyond Lynch's funds, however, no other fund had more than 1.8% of its assets in Groupon in its most recent portfolio, and the next-largest stake from a fund that isn't tiny is a 1.3% position at American Funds New Economy ANEFX. Another fund from that shop, the gargantuan American Funds Growth Fund of America AGTHX, owns shares of Groupon, but its position represents just 0.26% of its $130 billion asset base. The much smaller Davis Opportunity RPEAX owns a stake as well, but the analyst-run fund still has just a 1.2% holding, making it just the 30th-largest position in the fund at the end of 2011.

It's worth noting here that Lynch has also invested in shares of Facebook, which is not yet a publicly traded stock. (The above American Funds and Davis Opportunity don't own shares.) CPOAX and AMOAX stash 3.6% and 3.7% of their assets in Facebook, respectively. Will Danoff of Fidelity Contrafund and Steve Wymer of Fidelity Growth Company are two veteran managers who run broadly diversified portfolios, but each has made a good deal of money by spotting highly successful companies early on. Each owns small positions in both Facebook and Groupon. Facebook appears to be on much firmer footing than Groupon, so investors excited that a fund owns the former--or dismayed that a fund owns the latter--should keep in the mind that these deals may balance each other out.

Little Bargain-Hunting to Be Found
It's also telling that funds don't appear to be adding to their Groupon positions as the stock price declines. True, the most recent full portfolios disclosed by funds that do so monthly are from the end of February--or the end of December 2011 for funds that only release their holdings once per quarter. But the stock was already well off its high by the end of February, trading at under $20.

Fidelity's Danoff and Wymer were also enthusiastic investors in another heralded IPO-- Google GOOG--from the start, adding to their positions in the months following its IPO even as the stock kept rising. But in the case of Groupon, it's clear that neither one is convinced yet. Danoff took a 0.22% position in October after the IPO, added a small number of shares the following month, then cut back a bit in February even as the stock got cheaper. Wymer, who first bought the stock in November, took only a 0.15% stake then and has since sold half the fund's Groupon shares through February.

Dennis Lynch's funds aren't showing increased interest in the stock either. MPEGX just released its end-of-February holdings, and its Groupon share count is unchanged. As a result, the stock, previously a top-10 holding, has drifted down to a 1.6% position. As a point of comparison, Lynch couldn't own Google in this fund (it hit large-cap territory quickly), but in CPOAX he established a 1.7% position in that stock four months after its IPO and had a 5% position in AMOAX three months later.

As for AGTHX, ANEFX, and RPEAX, none have released full portfolios since the end of 2011. But although Groupon fell in February, it didn't show up in the top-10 holdings of any of the three funds at the end of that month, despite the fact that value-oriented investors run at least portions of all three funds.

Fund managers clearly don't see Groupon as another big winner thus far. Will they scoop up more shares following the stock's continued decline? Stay tuned.

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Greg Carlson is a fund analyst with Morningstar.

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