Seeking Alpha
Long only, research analyst, portfolio strategy, media
Profile| Send Message|
( followers)  

Is it a good time to take profits if you are long Sirius XM (NASDAQ:SIRI)? With the recent sharp rise in share price, some investors are likely asking themselves that question.

Sirius XM recently had plenty of space left to continue its recent move upwards. Consider what I said here:

Times are now different. We have a few answers that were needed, and Sirius XM has now been shrunk by roughly 3.33%. $3.25 now, is not the same as it previously was at higher share counts, and Sirius XM could see additional appreciation from here of that 3.33% in short order.

It remains to be seen "just how high she will go" but I believe investors are on strong footing going forward, and should look, finally, to prices beyond $3.25 in the coming sessions.

While the day closed with a 3.23% gain, and not 3.33%, I think it's safe to say my expectations were correct.

Game over? I think it's a bit early for that. I believe Sirius XM has room to move higher. Let me outline a few reasons as to why.

First and foremost it is critical to understand the points I was looking for in the Q1 conference call and why. They were points of uncertainty, and question marks hanging over an equity are never a good thing. With those question marks removed, it's like a weight which has been lifted, allowing Sirius XM to trend higher.

And it has done so with considerable force.

(click to enlarge)

Two high volume days and two very strong advances for Sirius XM point to continued appreciation ahead. I don't think it will stop here. While some may find it tempting to take profits, I believe additional upside could be found in this run. These are large, high volume moves. What goes up must come down? Eventually, but Sirius XM's advance has shown few signs of slowing down.

Investors need to consider that with the buyback plan in place, and shares being removed, their ownership in the company is increasing in proportion to the number of shares bought back and effectively "retired" from the outstanding share count. That means the shares you own are worth "more" moving forward.

Yes, the expenditure of cash or debt to buy back shares is basically a wash when it happens. But, so long as the company appreciates at a greater rate than the cost of debt, the share buyback has increased the value of your holdings.

And it's not stopping. Sirius XM will continue to buy back until the $2 billion allocated is finished, and it is my expectation that the company will further increase this amount going forward. That should serve as great support for the stock to move up while the buyback process is in place. In the quarterly conference calls like the most recent one, investors can reevaluate their positions based on how many shares have been bought back and the new percentage of the company they own.

There's also another issue which is coming up very quickly. Some have speculated that Liberty Media (NASDAQ:LMCA) may be interested in getting the capital back on the higher basis shares it purchased last year to go to control of Sirius XM. Those purchases began on May 8th, and on the 1 year long term anniversary, Liberty Media may be interested in selling shares back to Sirius XM. Investors may find that Sirius XM is able to repurchase a very large number of shares in one fell swoop, and Liberty may find the recent higher prices as attractive sale points.

In my opinion the more shares Sirius XM is able to repurchase in the $3 to $4 per share range, especially the lower end, the better.

Of course, as with any investment, there are risks involved. As I have repeatedly stated, my view is that long term, Sirius XM is on strong footing to yield solid gains for the year, and my end of year price target still stands at $4.25. Investors should keep a keen eye on the overall market.

There are a lot of bears out there screaming sell sell sell. They've been wrong until now, but at some point they will be right, and Sirius XM is not immune from an overall market downturn. The buyback program is limited to 25% of daily share volume, and that may not be enough to stop a drop if the markets roll over.

It's also important to understand that some will seek to take profits at these levels, and at some point even shorts may begin to pile in. If investors must sell sooner rather than later, it's wise to stay tuned to any weakness the stock may exhibit in order to sell here and lock in those gains.

Me? I'm looking for continued appreciation of the stock and have a near-term target of $3.50. That represents a potential upside of 4.1% over current pricing in the coming sessions. Those who need to sell in the short term may find attractive pricing in Thursday's trading.

Source: Sirius XM Reaches $3.39; Time To Take Profits?

Additional disclosure: I am long SIRI January 2014 $2 and $2.50 calls.