Sirius XM: Where's Faulkner?

Oct.22.13 | About: Sirius XM (SIRI)

I must say that it is both flattering and humorous at the same time to read so many posts and emails lately asking "where's Faulkner?" I've been accused of being a narcissist at times, but on the other hand I tend to not take life too seriously. With the manhunt in full force for Faulkner's input on Sirius XM (NASDAQ:SIRI) such as in the comments section of this recent article, I can't help but conjure the following image in my head over and over again :

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Where's Faulkner? Sounds like a great coffee table book to me. I might even give good old Waldo a run for his money.

And running for money is a perfect transition here. Sirius XM has certainly appeared to be running for the money this year, up from last year's close just under $3 per share to today's close of $4.10. It's up 38% YTD and yes, I am of the opinion that it has room to run.

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One of the nicest things about this appreciation is that it has been wholly predictable. I'm not saying that one can predict exactly where a share price of any company will be in 6, 12, or 24 months time, but when I wrote back earlier in the year that Sirius XM would be one of the best investments in 2013, I was quite clear :

Let me be clear from the start. When I refer to Sirius XM as one of 2013's best investments I am not saying that Sirius XM will post the greatest gains. There are companies out there which are more speculative in nature which may return 100% or more over the course of 2013. You may find a biotech that has the small chance of possibly returning 1000%. What I am referring to is the degree of certainty and stability which I feel will follow Sirius XM throughout 2013 in order to end the year at gains between 27% and 43%.

With yesterday's close of $3.14 this represents an end of the year target between $4 and $4.50 per share.

I wrote that on January 9th, and here we are within that range as we await the company's release of Q3 numbers. Sure, you could have speculated on Netflix (NASDAQ:NFLX) or Tesla (NASDAQ:TSLA) and doubled or more, but could you be sure those stocks would post such increases in share price? If you answer "yes" here, then I ask you, why didn't you say so? For the few that suggested those stocks to me, I don't know many who followed their own advice.

My Advice?

My advice has been simple, and my holdings this year have consisted of 98% shares and options in Sirius XM, held with a 12 month viewpoint down the road. I have beat the golden drum and screamed "buy at or below the 50 day moving average!" time and again suggesting that indicator would offer the best purchase points for the equity, and my estimation and January 2014 option expiration target has moved from $4.25 to a brush with $4.50. We're at $4.10, with approximately 3 months to go. Right on schedule, and right on target.

My Strategy?

I'm in options. I filtered into January 2014 $2 options for Sirius XM in small doses earlier in the year as prices were favorable until I was almost all in. As time has gone on, I have bought higher strikes. $2.50, $3 and $3.50 options now make up parts of my holdings as I am more and more confident about the macro situation. These options simply give me leverage. When you can buy a $2 option for $1.05 when the share price is $3 you nearly triple your exposure for a small time premium. It's a high risk strategy but when you are confident in your targets it can yield greater reward.

Simple case in point, options purchased at $1.05 earlier in the year are now worth $2.10, 100% gain on an underlying 38% increase in actual share price.

And that's why understanding your investment and where it is going and likewise, where the share price is going, is so important. Write out simple covered calls? You could cap your upside. Those who have written $3.50 covered calls have made a good return, but the long stock or long option holder have already done better, with 3 months left to go. Pick a strike too high on the long side? You might find you have $0 at the end of the year if the share price never makes it.

The Reasons?

So why has Sirius XM done so well? You can blame the overall market to some degree. The bull market has certainly helped to carry stocks higher over the course of the year. Certain bits of uncertainty aside, there really hasn't been anything to worry about. Remember, the media *needs* you to worry, otherwise people lose interest. Are you going to tune in to the footage of a tornado ripping down a massive bridge, or are you more likely to tune in to footage of that same bridge and its opening ceremony after construction? Listen to CNBC or read a bunch of articles and tally up how many times the following is said :

"The question is..."

Keep the questions perpetual and you hold the audience, but I'd argue that there's little to no actual value in that. There's value in answers, not questions.

This being said, understanding media tricks will help you to keep calm in manufactured crises. There's comparatively little money for the reporter or the writer in "everything's fine" and let's face it, you, the reader, want where the money is for "you" and not "me."

Everything's fine has been the name of the game with Sirius XM this year. As I said in January, strong auto sales coupled with Sirius XM's $2 billion (likely to be extended) buyback program as well as strong company performance would allow the equity to appreciate at an expected rate of about a half cent per day. Slow, boring, and wonderfully predictable and thus lucrative for those that held strong.

For some investors, such a simplistic view will not suffice. Luckily those investors have here on Seeking Alpha a host of authors and commenters who will dig into every minute detail about the company and its performance. There is value here for every type of investor, but for those who like to keep things to the most simplistic terms, it bears repeating :

  • Demand for the product driving upside
  • Demand for the stock limiting downside

These are the two major players for 2013 for Sirius XM, and these are the two factors which should keep Sirius XM on its current trajectory. If you're seeking the best buy points? I'd argue that buying near the 50 day moving average would be a good idea. Unless 2013 brings a strong overall bear market, I would expect 2013 to end the year for Sirius XM between $4 and $4.50 per share.

With Sirius XM announcing a $2 billion extension to their already announced $2 billion buyback, bringing the total now to $4 billion in capital to be returned to investors, the story will continue for some time.

Are you concerned that Liberty Media (NASDAQ:LMCA) has hedged the shares it will sell into the buyback in three installments into 2014? Don't be. The boundaries, capped at $4.18, are a prudent measure to lock in a certain range of pricing in the face of what appeared to be macro uncertainty. Liberty will sell back at a weighted average price determined by the share price over several trading days after Sirius XM's Q3 announcement on October 24. Don't look too far into it. From an investor standpoint the boundaries do not represent a "cap" on the share price until April, and they most certainly do not have anything to do with where Liberty expects the share price to be for the next 6 months.

Q3 and beyond.

So what am I looking for in Sirius XM's Q3 numbers? The same as I have been looking for in other quarters. Continued strong company performance. Increased subscribers. Relatively stable metrics or metrics that are trending positive over the last several quarters. Keep it simple, because I am of the opinion that cutting everything up with a razor blade and over analyzing all the pieces is the wrong way to look at the big picture. Obsessing over what might be a .001% increase in churn or a $0.03 increase in subscriber acquisition costs will do you more harm than good.

The fact of the matter is that the path Sirius XM has been on has not changed. Because the trajectory remains the same, the target remains the same. Where's Faulkner? I'm relaxing , enjoying the ride, and getting ready to start thinking about year-end 2014. 2013, in my opinion, is currently in the bag.

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.

Additional disclosure: I am long SIRI Jan. 2014 $2, $2.50, $3, and $3.5 options. I may write $4.50 Jan 2014 covered calls against these positions before expiration depending on expectations after Q3's numbers are released.