Best Buy vs. Groupon: Deadliest Portfolio Killer

BBY Chart BBY data by YCharts

NEW YORK ( TheStreet) -- If you look at a chart for either Groupon ( GRPN) or Best Buy ( BBY), the first thing an investor is likely to notice is that they both travel from the top left to the bottom right. Best Buy is from the old guard jumbo box retail while Groupon is part of the online revolution in marketing; however, they both share many similarities beyond causing investor losses.

Groupon is headquartered in Chicago, and the stock trades an average of 7.1 million shares per day with a market cap of $5.7 billion. Since its IPO, the most consistent aspect of Groupon is the price decline in its share price.

I like how Groupon reminds me of 1998 and the dot.com bubble. Technology IPOs from companies that lose money bring me back to the days of watching the movie "Rounders" and listening to Santana's "Smooth" on the radio.

Mark Twain is often credited to have said, "History doesn't repeat itself, but it often rhymes." I don't know if he said it or not, as I wasn't there, but it sounds like him. Nevertheless, it sure holds true in the stock market. Funny how quickly people forget history, or maybe it's new investors who haven't studied the past bubbles. It could be that people believe "this time is different."

Two things turn on my BS alert system the fastest. When I hear or read "this time is different" or "studies show _______ (fill in useless BS here)."

The average analyst price target is $18.88, and the only way I can figure out how they came up with a number like that is that they typed the wrong symbol into the system during the company examination. In the last month alone, Groupon has lost 15% of its value, and there is little reason to believe the trend is about to end. But we are getting ahead of ourselves. Let's take a look at Groupon's biggest-loser competitor: Best Buy.

The company was founded in 1966 and is headquartered in Richfield, Mn. Best Buy trades an average of 12 million shares per day with a market cap of $7.2 billion.

For as long as Best Buy has stayed in business, it is surprising to see an upstart Internet company come close to reaching the same market value. Such is the life of a popular Internet stock.

Best Buy is what happens when you add eBay ( EBAY), Amazon ( AMZN), Yahoo! stores ( YHOO) and Google ( GOOG) to the world of retail.

eBay has allowed everyone with a space bedroom and a tape gun to sell online. Margins for just about everything you could ever want, along with a lot of products you never want, have fallen as a result.

Increased competition for Best Buy comes from the Internet retail giant Amazon. Walk through any Best Buy store and the amount of products you can't find for sale on Amazon probably fits inside the top half of a shopping basket.

Best Buy sells to the exact demographic most likely to have a smart phone that can zap any UPC code and a look up prices on Amazon, eBay, Google and Yahoo! Stores in a flash. How can a big-box retailer with big-box expenses compete with warehouse space that consists of empty garages and spare bedrooms? The quick answer is they can't, not with the same products at the same margins Best Buy once enjoyed.

We will compare the dot.com bubble Groupon verses the walking-dead retailer Best Buy to see who is the greatest loser and who may offer investors a value.

Short-sellers are considered the smart money on Wall Street. It's no surprise when you consider few retail traders short sell and many of the most successful traders/investors are short sellers. Let's compare the level of short interest to see who has the edge. For a comparison, we will first look at eBay, Amazon, Google, and Yahoo!.

eBay 1.8% of float
Amazon 2.5% of float
Google 1.7% of float
Yahoo! 3.4% of float

Yahoo! is the highest at 3.4%, but even at 3.4%, the stock is not under pressure by short sellers piling on. Now we look at Groupon.

Groupon short interest is a clear signal from Wall Street. The easy money is expected from shorting. Groupon, as of the last reporting date, has over 11% of its float shorted. While the amount of short pressure does make for an enormous short squeeze during an earnings beat or other similarly fantastic news, the most valuable piece of information to take away is that smart money is betting against it.

Best Buy reports in at over 19% of its float shorted. Nearly one out of every five shares is shorted. Best Buy's 45.3 million shares short isn't the highest amount in the last 12 months, but comes close to the 54.5 million share record less than six weeks ago.

Best Buy, Groupon and Yahoo! each have one analyst who recommends selling shares. For buy recommendations, Groupon has eight. That's eight out of 19 analysts following Groupon who recommend buying it. Clearly, that has worked out wonderfully for those who have followed the advice. The next time an analyst gives a buy rating on a new IPO, keep Groupon and the eight who recommend it in mind.

The strongest in our list is Google, with 29 out of 31 analysts recommending buying shares, including 26 strong buys. Amazon comes in just ahead of eBay, but of this group, I like Google best for the earnings-growth potential. Real Money Pro's Eric Jackson wrote a good article that includes Groupon: "A Good Time to Get Connected?" (You may need a subscription or free trial to read it.)

I believe Amazon is going to face the same fate as Best Buy, once Amazon investors figure out an earnings multiple above 80 almost always leads to tears and losses. Keep in mind when someone says "this time it's different" it's a sign to run.

As much as Best Buy has destroyed portfolio values, it appears the worst is over for the store. The problems with the old CEO and board will quickly be forgotten. The company does need a solid and permanent CEO sooner rather than later. Several people currently at Best Buy can effectively fill the role, so I would expect an announcement soon. When Best Buy does announce a permanent CEO, the stock should pop higher.

I like the September $20 put options at $1.85 for an entry method into Best Buy. The options are currently trading for about $1.75, leaving a cost basis for shares of $18.15 if the stock falls further. Selling put options is less risky than buying the shares outright, plus an investor can profit even if the shares fall a little further than the current trading range today.

Groupon's earnings release is scheduled after the market closes about a month from now, on August 8. Anyone buying shares is betting on the growth story, and the ability to monetize the growth.

Like Best Buy, I will admit the option premium with Groupon appears attractive. Selling volatility with losers can get ugly very fast and stop losses are a must. With that said, a bullish credit spread selling one August $8 put at 85 cents and buying one August $6 put for 25 cents for a net credit of 60 cents appears to offer a reasonable risk-to-reward ratio. The most that this type of trade can lose is $1.40, with a potential profit of 60 cents.

Bottom line: If asked to pick the biggest loser of the two, I've got to go with Groupon. What an ugly dog.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.