The Stock Everyone Hates is Up 6% Already in 2013, With Bill Miller Aboard

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Groupon (GRPN) may have more detractors than any other single publicly-traded company in the United States, but at least one well known investment figure is showing the much-despised stock some love: Bill Miller, the veteran Legg Mason portfolio manager whose former fund, the Value Trust, outperformed the S&P 500 for 15 straight years, a period that ended in 2005.

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Today, Miller co-manages the Legg Mason Capital Opportunity Trust fund along with Samantha McLemore, who has been with Legg Mason for about a decade. Beginning in the second quarter of 2012, when Groupon’s stock price traded at nearly double its price today, the duo has been adding to the fund’s holdings of the ‘daily deals’ company. It was one of the few drags on the company’s returns last year – indeed, the fund’s 2012 gain of nearly 40% dwarfed that of the S&P 500.

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GRPN Chart

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But so far this year, something different seems to be taking shape, as seen above in a stock chart. Groupon is the third best-performing stock in the Miller/McLemore portfolio, ahead some 6% since the beginning of 2013. Could the theory behind the managers’ decision to own Groupon be paying off at last?

The rationale is that Groupon’s business model – building a marketplace for local commerce in the same way that Amazon (AMZN) has constructed an online market for global business transactions – has the same kind of potential that Amazon’s did. They are encouraged by the company’s push into the goods business, despite the fact that margins are lower, because of the cost of holding goods.

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GRPN Gross Profit Margin Quarterly Chart

That slippage in profit margins has caused analysts to cut their profit estimates for the company. But then, analysts who cover Amazon have noted that the company has managed to greatly expand its footprint and market share even during periods when its profit margins have been slim to nonexistent. Still, Groupon’s free cash flow doesn’t present a very appealing picture, either, explaining why the company has struggled to hang on to most of its investors since its IPO.

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GRPN Free Cash Flow Chart

The question now is whether a string of relatively recent transactions can help Groupon evolve from just another daily deals company into a kind of central hub for local businesses that enables those smaller companies to boost their business and sales. Most recently, Groupon announced it had acquired Glassmap, an app that tracks users’ locations and directs them to deals on a real-time basis, enabling small local companies to target users based on where they are and what they’re interested in. Late last year, Groupon snapped up CommerceInterface, which offers retailers and others a Web-based platform to make online sales run more smoothly. There’s plenty of execution risk here in these and other acquisitions by Groupon as the company pursues its own “daily deal” approach to growth. But if the company can knit these acquisitions together, there’s at least a chance it can emerge from the doldrums. That’s why Miller and McLemore are believers, and it’s the biggest reason for the stock’s gain of nearly 6% so far this year.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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