Groupon (NASDAQ:GRPN) has had a strong start in 2020, with GRPN stock climbing 20% so far this year. Most of the gains have come as a result of California-based activist investor MIG Capital buying a 5% stake in the online discounts company.
Consider the timing of MIG’s investment.
On Nov. 4, Groupon released its third-quarter results. Groupon’s stock fell 9% on the news, which included adjusted earnings per share of 1 cent, 2 cents below analysts’ average estimate. Year-over-year, the company’s EPS, excluding some items, fell 75%, while its revenues declined 16.4%.
Groupon CEO Rich Williams continued to sell the company line, saying that GRPN’s strategy will deliver for its shareholders. But its Q3 results suggest that isn’t the case.
As plain as day, investors can see that Groupon lost 3.7 million active customers YoY in North America in Q3 while adding 100,000 overseas customers. Compared with Q2, it lost 1 million active customers, 900,000 of whom were from North America.
Once the bad news set in, GRPN stock fell to $2.23 from over $3 in late December. And then, MIG Capital came to Groupon’s rescue.
On Jan. 3, MIG Capital filed a document with the SEC that indicated that MIG, an asset manager, owned 28.3 million shares of Groupon stock, making it the company’s seventh-largest shareholder and giving it a 5% stake in GRPN.
MIG Wants a Seat on Groupon’s Board
According to its 13D filing, MIG Capital would like to see Richard Merage, the founder of MIG, be elected to Groupon’s board at the company’s annual meeting in June.
Merage and his family sold Chef America to Nestle (OTCMKTS:NSRGY) for $2.6 billion in 2002. To ensure the deal got done, Merage moved to New York to work with Goldman Sachs (NYSE:GS) on getting the transaction to the finish line. While in New York, he was approached by all kinds of investment professionals who were looking to manage his newfound wealth.
But he realized was that he could take his operational experience and apply it to portfolio management, something that wasn’t being done at the time. So, he moved back to California and set up an investment firm to handle some of his capital.
Focusing on consumer-oriented stocks, MIG uses a long/short approach. It holds the stocks it’s long for an average of 24 months.
While Merage and the rest of the MIG team like to speak to the management of the companies in which MIG is investing and offer their feedback from time to time, the firm doesn’t consider itself an activist investor.
As of September 2019, MIG had $774 million invested in 22 holdings, including 25.9 million shares of GRPN stock. It added 2.4 million shares of Groupon in the final three months of 2019.
The fact that MIG Capital is trying to seek a board seat when it’s not the largest or second-largest shareholder does bother me from a governance standpoint. But, on the other hand, Groupon can use all the help it can get at this point.
The Bottom Line on GRPN Stock
On two occasions last quarter, I recommended that investors avoid the shares.
MIG Capital bought Groupon stock at prices between $2.22 and $2.92 in the last 60 days of 2019. It has a vested interest in raising the company’s share price above $3.
Another InvestorPlace columnist, Luke Lango, recently suggested that Groupon is a great contrarian play. He is so convinced that he’s long GRPN, putting him in the same company as Richard Merage.
Should investors like Groupon stock because MIG Capital and Lango do? I don’t like GRPN stock, but that doesn’t mean MIG and Lango are wrong.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
