AAII Investor Update: Learning From Groupon’s Plunging Stock Price
Thursday, August 23, 2012
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 42.0%, up 5.1 points
  Neutral: 32.2%, down 2.9 points
  Bearish: 25.9%, down 2.2 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »

The collapse of Groupon’s (GRPN) stock price provides a good lesson of how the rules regarding business models haven’t changed. The beleaguered stock has fallen by more than 80% since it first started trading on November 4, 2011.

Accounting issues aside, investors have long had a reason to be skeptical of Groupon’s business model of selling coupons. Granted, Groupon found a new way to sell coupons by requiring a minimum number of consumers to participate in the deal, but at the end of the day, consumers are paying Groupon to get a discount at a local business. Newspapers have long distributed coupons and advertised promotions. Plus, there is no shortage of companies delivering coupons to consumers’ mailboxes and email inboxes. Visiting a company’s website, liking its page on Facebook or signing up for its newsletter can also provide discounts. In short, there are plenty of venues to find deals (and I haven’t even mentioned Groupon-like competitors such as Living Social or websites such as RetailMeNot.com).

Successful growth companies find a way to differentiate themselves from the competition. Philip Fisher wrote about the importance of having a clear competitive advantage in his classic book, “Common Stocks and Uncommon Profits,” originally published in 1958. It’s no different in the technology and Internet arena. Successful companies both create new value for customers and erect tough barriers to entry. Amazon (AMZN) and Apple (AAPL) are two good examples.

In contrast, Groupon merely had a new idea for how to promote and distribute coupons. Its crowd-oriented deals attracted a lot of favorable press initially, but there has been backlash since. Although some businesses have had success using the service, others have complained that the offers only bring deal-seekers, as opposed to creating new repeat customers. There have also been reports about unhappy consumers who have found restaurants packed or otherwise had difficulty making use of the coupons. In other words, the amount of value being created is questionable.

A new business story is exciting, but as Groupon has showed, it is always important to step back and ask whether there is any real substance behind the hype. As the stock’s price performance indicates in the case of Groupon, many investors have determined that the answer is “no.”

SEC Chairman Mary Schapiro Vents about
Money Market Funds

Last night, Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro issued a strongly worded statement about the lack of progress on money market fund reform. At issue are proposals to require stronger capital buffers and to allow money market fund share prices to float instead of being fixed at $1, as they currently are. The fund industry opposed the reforms and Schapiro lacked the votes to move her proposals forward.

It is very unusual to see the head of the SEC publicly express frustration like this. Though her intent is to get others to act and perhaps build public pressure for reform, it is unclear how, if at all, her statement will move reform forward.

As far as the safety of money market funds is concerned, it is important to realize that no money was lost during the 2008 financial crisis, though some funds were frozen. This is not to say that money could not be lost in the future, but the risks are low relative to stock and bond funds. Bank accounts and certificates of deposit (CDs) covered by the Federal Deposit Insurance Corporation (FDIC) are safer, however. Unlike money market funds, cash invested in FDIC-insured products—up to FDIC’s limits—is protected from a loss.

Like any other investment vehicle, the amount of risk a money market fund incurs varies. Some fund managers take on more risks than others. This is why it is important to look at the prospectus and the portfolio holdings. You should also look at the yield since the above-average yields of a money market fund typically mean the manager is investing in riskier assets.

More on AAII.com

Come See Us at a Local Chapter Meeting

Next month, my colleagues, Wayne Thorp and Joe Lan, and I will visit several local chapters. Here are the dates and locations:

AAII has chapters throughout the country. To find information about upcoming meetings near you, visit our Local Chapters page.

The Week Ahead

Just a handful of S&P 500 member companies are scheduled to report next week as second-quarter earnings season comes to a close. Among those on the calendar are Tiffany & Co. (TIF) on Monday; H.J. Heinz Company (HNZ) on Tuesday; Brown-Forman Corp. (BF.B) and Joy Global (JOY) on Wednesday; and SAIC (SAI) on Thursday.

The first economic reports of note will be the June S&P Case-Shiller housing price index and the Conference Board’s August consumer confidence survey, both of which will be published on Tuesday. Wednesday will feature the first revision to second-quarter GDP, July pending home sales and the Federal Reserve’s periodic Beige Book. July personal income and spending will be released on Thursday. Friday will feature the final August University of Michigan consumer confidence survey, July factory orders and the August Chicago purchasing manager’s index.

Cleveland Federal Reserve Bank President Sandra Pianalto and Chicago Federal Reserve Bank President Charles Evans will speak at separate events on Monday.

The Kansas City Federal Reserve Bank will hold its annual symposium in Jackson Hole, Wyoming, starting on Friday. Federal Reserve Chairman Ben Bernanke is expected to speak, though it is unknown whether he will say anything that will alter the expectations of a new round of monetary stimulus. European Central Bank President Mario Draghi and International Monetary Fund President Christine Lagarde are also scheduled to speak at the symposium.

The Treasury Department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.

AAII Sentiment Survey

Bullish sentiment is above its historical average for the first time since March 29, 2012, according to the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 5.1 percentage points to 42.0%. This reading ends a streak of 20 consecutive weeks with bullish sentiment readings below the historical average of 39%.

Neutral sentiment, expectations that stock prices will stay unchanged over the next six months, fell 2.9 percentage points to 32.2%. Even with the decline, neutral sentiment is above its historical average of 31% for the fourth consecutive week and the eighth out of the last 10.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 2.2 percentage points to 25.9%. This is the fourth consecutive week that bearish sentiment has declined. It is also the lowest level of pessimism recorded by our survey since March 29, 2012. The historical average is 30%.

Since bullish sentiment reached nearly a two-year low of 22.2% on July 19, 2012, optimism has rebounded by a cumulative 19.8 percentage points. Rising stock prices, a lack of new negative macro headlines and data showing that the U.S. economy is not stalling have all combined to improve individual investors' moods. The optimism is cautious, however, as individual investors continue to fret about slowing global economic growth, Washington politics, and the European sovereign debt crisis. New negative headlines or a return of downward market volatility would dampen the current short-term optimism for stocks.

Bears and contrarians may notice that this week's readings are close to those registered on March 29, 2012, right as the first quarter’s rally was reaching its peak. This is simply a coincidence (and we hope not one that ends up foreshadowing future events). This week's readings are well within the typical ranges we have seen throughout the history of the survey.

This week’s special question asked AAII members if they expect the Federal Reserve to announce another round of quantitative easing (QE3) within the next few months. More than half of respondents are not expecting the Fed to act. About a quarter of the respondents expect the Fed to announce another round of monetary stimulus. Other AAII members were split between being unsure, listing the odds of new stimulus as 50/50, or not expecting any action to occur prior to the November elections.

Here is a sampling of the responses:

  • “The economy is improving, although slowly. I do not expect another round of quantitative easing.”
  • “I don't think they're going to do it. Slow growth is acceptable. They've also held back to keep from looking political.”
  • “Unless the economy gets significantly worse, I don't expect another round of stimulus.”
  • “I believe there will be QE3, but its real impact will be minimal.”
  • “I expect there will be another round of stimulus soon, but I don't think there should be any more stimulus.”

» Take the sentiment survey

Wishing you prosperity,

Charles Rotblut, CFA
AAII Journal Editor