The market lost on a Tuesday for the first time in over twenty straight Tuesdays. The market saw early gains after the Trade Balance showed a smaller trade deficit at -$40B versus expectations of -$41B. That news was bullish for the market, but things started to correct in the afternoon after Fed President George noted that he backed tapering QE. Another speech from Fed President Raskin said that much more jobs growth was needed, showing the mixed signals from the Fed. With the potential for QE to get slashed still alive and well, we cannot be strongly bullish on the market. Bad economic data becomes a reason to keep QE, but its also bad for the market. At the same time, good news pushes QE tapering more quickly.
Stocks To Trade:
The current story for Sirius is really not what is happening so much there, but what is happening at Apple (AAPL). Starting on Monday, June 10, AAPL will host its Worldwide Developers Conference, which is usually a forum for Apple to talk about new products, unveil new developments, etc. Going into the meeting, the speculation is that Apple will release its iRadio (in some capacity) application. What will this application do? How does it work? While most is speculation, analysts expect the radio to be much like the Pandora Radio application that allows individuals to stream music and find similar artists. Two signs point to a possible announcement next week - AAPL has signed a deal with Warner Music as well as Universal. These deals are part of the royalty rights for Apple. The service is expected to be free and supported by ads. It's a big win for AAPL, as it will be directly linked with iTunes where individuals can go and buy songs they like.
So, what does that mean for SIRI then? Is iRadio a big hit to Sirius XM? In 2012, SIRI grew subscribers by 9% despite the strong success of Spotify and Pandora. While the space is crowded, SIRI continues to benefit from its automotive strength over its Internet usage like Spotify and Pandora. While details of iRadio are again sparse, we believe it will be an internet-based application that will not be as easily accessible in the car. The issue for SIRI, though, is that the company has wanted to increase its online radio offerings and users to help boost growth. IRadio may be a hindrance to that given AAPL's ability to be successful in most endeavors they have taken on in the last ten years. Overall, though, the key for SIRI is automotive. What the company is doing in cars - getting into new cars, getting new drivers on free trials - is the key for this company, and we do not see iRadio hindering significantly on that role. Further, as we have noted previously, having SIRI in new cars is going to be good eventually for the used car market:
Currently, the company has satellite offerings in 50M cars through their production in new cars. In the next ten years, that rate should go from 50M to 150M. Tripling the revenue in ten years is a great long-term revenue stream. On top of that, SIRI will benefit as new cars move into the used car industry. As new owners own those cars, they have the ability to instantly turn on the satellite radio. In 2013, the company will see 1.5M gross additions in 2013 to satellite radio. Here is the company's CFO talking about the user car potential:
The next phase is as those cars begin to turn over into the used car market and, by the way we continue to build the new car production, so in the next, we have gone from zero to 50 million cars in the first 10 years of factory installed radios. In the next 10 years, we'll go from 50 million to a 150 million enabled vehicles. But the real story and I think the next 10 years is going to be about access to the previously owned car buyer. 80% of the households in the countries have a previously owned car in them and 70% of the cars sold in the country every year are previously owned vehicle. So, it's a market that we have not really tapped in this first 10 years of execution and I think we are going to have a great long-term growth story in the next 10 years.
In the past two weeks, SIRI stock has dropped north of 6%, and we believe much of this pullback is being caused by rumors around iRadio. Overall, we do not see this as a threat to SIRI at this point, and we believe the combination of growth and value makes stocks appealing on this pullback. Shares are currently trading at a 0.2 PEG ratio (1 tends to be a solid PEG ratio for value), which is very low. The company is expected to grow north of 11% this year and 9% next year in sales. SIRI is a great growth name right now, and we should use this weakness to buy shares.
Position: Long, SIRI
Entry: Pullback to 3.25 - 3.30
Exit: 3.60, 4.00
Auto sales have been on fire to start 2013, and automakers have benefited strongly. General Motors' stock is up 21% already YTD, and the question is can the stock continue higher. On Monday, the latest round of auto/truck sales information was released that showed another plus for GM but could suggest a top. The company saw a 3% rise in sales in May year/year. In January, the company saw a 16% rise in sales year/year. The figures for February through April were 7%, 6%, and 11%, respectively. Further, the company has seen great growth in China as well as with SUVs/trucks, which both fetch a higher margin than smaller, compact cars. The company saw another 10% in Chinese sales growth after 13%+ figure for April. Things are clicking, but the drop down to 3% in May was a red alarm for us. Some bad signs for automakers are used car prices dropping, movement into subprime loans and oversupply (from the Wall Street Journal):
Used car price also are beginning to drop, leaving buyers with less value on their trade-ins. Meanwhile, many automakers are expanding second-quarter production to build more cars, a move that could lead to overstocked showrooms and greater pressure for discounts later in the year, he said. "The market is peaking in value terms right now," Mr. Jonas said, noting that while auto sales may well rise throughout the year, pricing is likely to weaken. "The real sharp V shape is over," he added. Michael J. Jackson, chief executive of AutoNation, AN +1.84% Inc., said dealers are using more subprime loans. "Subprime is normalizing. It is just going back to where we were before the financial crisis, so of course the number is increasing," he said. "But we are not dependent on subprime to sell cars."
The stock also got a boost from its announcement that it would rejoin the S&P 500. While the move is definitely positive as it increases the amount of stock institutions will want to own, we worry that GM has gotten slightly ahead of itself for now. With shares up over 20% YTD, is there still more upside? There is and there is not. In the near term, we believe that GM has limited upside. The end of QE is going to start to bring a more "risk on" investment approach that will hurt GM. At the same time, the stock's future PE is at sub-8 and price/sales at sub-1, which both show tremendous value. We recommend buying GM long but equipping it with a near-term bear call spread to take advantage of a weakening markets. We like the Jul20 38/40 bear call spread offering 10% along with long in shares.
Position: GM, Long and GM, Jul20, 38/40 Bear Call Spread
Entry: Buy stock on retest of 20-day MA, 0.18 or higher on bear call spread
Targets: $40, $45 and 0.00
Tomorrow, the market will get some important data bout jobs that should give a signal as to what to expect on Friday. The keys to watch are Euro-Zone GDP expectations, ADP Employment Change, and crude inventories. ADP will be very important. Any weakness in that number could spell trouble, but a better than expected report would also signal an end to QE. Therefore, it is tough to know what is better for the market. Look for continued volatility as investors/traders prepare for a potential correction if QE is tapered. Additionally, we should be watching the Euro-Zone GDP. The Euro-Zone has started to show green shoots of success that we want to see develop to follow through here at home.
Charts courtesy of finviz.com.