When Angie's List Inc. ($ANGI) came public in 2011, investors thought this was a unique idea that made business sense for a public company that was a first mover in the local services marketplace. But four years later, a rally after a surprise profit during the reporting quarter has not brought many new investors - it is merely a rush for short sellers to cover shorts from higher levels. In other words, it’s the definition of a "Dead Cat Bounce".
Shares in Angie's list have been in an eroding downtrend for a year, never really lifting their head up after falling from $20 to below $5. This situation, wherein all the stock does is fall day after day after day, is a short sellers dream. A closer look at the price action shows shares started to fall in July of 2013 and have been in a continued downtrend from $28 – losing more than 80% of company value.
Going Long on Yelp and Short Angie's
I expect you will see short covering in Angie's List over the next few weeks, as portfolio managers look for another core short to replace Angie's List as total market cap continues to stay well below the $500M level at around $400M. Keep in mind, most portfolio managers will find a long side stock to pair with a short in the a similar industry. Most of the managers I talk to are long Yelp Inc. ($YELP) under $20 p/s and short Angie's List in the 20's from 2013 and have let this winning pair work its way through. It has been a profitable trade over the years, with shares in Yelp trading up to $100 and shares in Angie’s falling to as low as $5 p/s.
Most professional traders do not get married to positions forever. Often when the fundamentals change, portfolio managers will reverse the position, or substitute the stock they were long and carry the deteriorating long position, using it as a core short because they understand the company and have followed it for multiple quarters.
Yelp Will Become a Short for Market Neutral players
Yelp shares have broken down over the last few quarters, and with share price continuing to trade under $50, Yelp is a likely short candidate as the business model for connecting the consumer with local business falls short of investor expectation. The question for these market neutral traders is what stock they choose for the long side, and in many cases, they just offset the long with cash or an index option like SPDR S&P 500 ETF Trust ($SPY) in the traded pair.
Angie's List was a good idea four years ago, but the excitement of the IPO wore off fast. Now, years later, the entire sector of platforms connecting consumers is questionable, and on an interesting note, all you Amazon.com Inc. ($AMZN) users might want to look at who entered this space to leverage their customer base – proving it is not a standalone business model.
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