Sirius XM: Goldman Initiates $3.50 Buy Target, Options?

| About: Sirius XM (SIRI)

The first bit of news for Sirius XM (NASDAQ:SIRI) as of close yesterday was an initiation by Goldman Sachs of coverage of the company, and an initial target of $3.50 per share.

From the report by StreetInsider :

"We believe Sirius XM offers investors a mix of robust growth along with accelerating profitability and free cash flow that exceeds peers," the analyst comments. "Despite its performance year to date (+59% vs. S&P 500 +13%), we see incremental upside to the stock via greater than expected growth in free cash flow (NYSE:FCF) and FCF/share estimates. We expect SIRI to utilize FCF and an under-levered balance sheet (in accommodative fixed income markets) to aggressively repurchase shares, shrinking share count by 20% through 2015E and 45% over the next ten years."

While I agree with their assessment of Sirius XM, I actually disagree with their price target for 2013. I'm a bit more bullish, seeing closer to $4 and perhaps $4.25 in 1 year's time. My current near term target of $3.30 has merit and it is one which I believe may actually be hit this year. I believe Goldman is underestimating the combined impact of continued strong performance of the company as well as share buybacks which should be ongoing through 2013. In using a $3.50 target I believe Goldman is playing it safe, and giving themselves room to upgrade the target as share prices rise. There's certainly merit in being a bit conservative, though, and I feel this $3.50 price target will be well received by many investors. Still, watch for this target to be upgraded as 2013 unfolds.

You may be wondering why the title above ends with "Options?"

Consider a well written article by Seeking Alpha's Little Apple, discussing "triple witching" which is at play this week and will truncate with Friday's activity. Little Apple quotes :

It is the simultaneous expiration (or rollover) of various futures and options contracts. These contracts include some of the stock index futures, some of the stock index options, and the individual stock options. The simultaneous expiration of the three types of markets is the reason that the event is known as triple witching. However, with the addition of some single stock futures contracts, triple witching is sometimes referred to as quadruple witching.

Triple or quadruple witching can cause erratic behavior in the affected (and some non affected) markets, both during the week preceding, and on the expiration day. Some traders take no notice of this, some recommend caution, and others recommend not trading at all. Which reaction you choose will depend upon your trading style (scalping, day trading, etc.), your trading system, and primarily your level of trading experience (i.e. new traders will probably be more cautious than experienced traders).

Ghosts, goblins, witches? Is it better for investors to simply stay hands off through the week preceding that scary "witching" Friday? It appears in the case of Sirius XM that so far if you are long, the answer is yes. The equity appears to be holding the line and may even be due for another run up on the back of the Goldman announcement above. But what if I told you I may have found one of those witches? Keep in mind that the following contains considerable speculation, and much like witches and ghosts and goblins, may be better served as a scary tale for Halloween.

Last Thursday, 12/13, there was extensive options activity in shares of Sirius XM. When I say extensive, I mean huge volume. For those who were paying attention to in the money call options at the December 2012 and January 2013 strikes on this date, you would have seen over 1 million in volume on these in the money options. Considering each contract covers 100 shares, that is over 100 million shares worth of activity was covered by these transactions.

The interesting thing was that this activity did not appear as new open positions as of market open on the following day. Open interest for in the money near term call options actually decreased. What happened here?

It is my feeling that options were used to make short term plays or cover short positions due to the 12/14 ex dividend date. The over all decrease in positions the following day points to early conversion for options in the money in order for holders to receive the dividend. These options sold for little or no premium to the share price at the time, and may have presented excellent opportunity for a player, or players, to take on large numbers of shares without moving the share price.

So why may this be a "witch?" Because as of today, 12/18, these trades settle. Over 100 million shares settle out today, and depending on the sentiment of those who exercised those options, they may be interested in selling.

Consider the fact that not only have those players secured their dividend, but that the stock has appreciated considerably from the low $2.70's on 12/13, up to a pre market hit of $3.01 in trading today. Could the new holders of over 100 million shares be seeking to lock in some profits here on a roughly 10% gain? Perhaps, and that's something to keep in mind, and be cautious of.

For anyone who must sell soon for various reasons, I'd offer that selling into the Goldman news if the equity appears "toppy" may be a good choice, especially with this witch hanging around the corner. Does this change my target of $3.30 in the near term? Absolutely not. For longs who are truly long then long and strong is the name of the game. Short term volatility, if any, will not matter a year from now.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.