"Real knowledge is to know the extent of one's ignorance." - Confucius
Having written about Sirius XM (NASDAQ:SIRI) for quite some time now, and through following some other equities in the same timeframe, I am repeatedly astounded at how many individuals believe they can suddenly become an overnight trading sensation. If it's not trading, it's that the stock they had been long and strongly supported for such a long time is suddenly the sell of the century. If it's not that, whatever they just sold will go nowhere, is dead money, or that so many better opportunities are elsewhere.
Once the decision is made to sell, longs are fools, right?
Perhaps it's my relatively young age of 36, and perhaps I still have a lot to learn about investing. Honestly, I feel I will never know enough, and that I will always have a lot to learn. Chalk it up to my acceptance of the fact that in the grand scheme of things I know so very little.
We've all heard Confucius' quote above before. I heard it at a young age and luckily it sunk in quickly.
So what does this have to do with Sirius XM?
Simple. With the recent news that minority shareholders in Sirius XM may soon be voting on an equity swap from majority owner Liberty Media (NASDAQ:LMCA), investors, shorts, traders in that SIRI ticker have been thrown a bit into disarray. Some may have been caught off guard. Arguably nobody saw it coming and if anyone did, nobody let on to that fact.
This is not to say I had any idea Liberty Media would be making such an offer, but I had mentioned to a few individuals that Liberty Media had not declined as much as Sirius XM had recently. The two companies typically have traded in kind with one another with very small degrees of deviation on their charts. After Sirius XM's Q3 earnings, though, Sirius XM was severely punished, yet Liberty was not.
Notice the two charts. Notice that they mirror each other until Sirius XM's Q3 release. Notice the huge gap between both charts until the acquisition announcement. The reason they have traded in parity for so long is simple. Liberty Media's market cap is over 70% its stake in Sirius XM.
The time for Liberty to make an offer was clear. With Sirius XM down and Liberty down only a small fraction in comparison, either Liberty was over valued or Sirius XM was under valued. After the news hit, Sirius XM rocketed up from the $3.50s to the $3.85 area and traded over 750,000,000 shares in the next three trading days. Nearly $3 billion has changed hands in those three days. Caught short in the $3.50 area? You may have been pushed to cover. Sold out at $3.50 because you "couldn't take it anymore"? You may not see that pricing again anytime soon.
Here's the deal. The Q3 results were not particularly bad for Sirius XM. Understanding that the company does not need to grow subscribers at the same growth percentages to continue to drive free cash flow and earnings at a significant clip is imperative to understanding Sirius XM's subscriber model. Each incremental subscriber, given a stable or increasing revenue per subscriber, and given costs which increase slower than revenue, is a more profitable subscriber than the last. The more you know about the company and how it is valued, the better prepared you can be to take advantage of dips to add to your investment, or to time a sale.
Spencer Osborne, who runs premium coverage for Sirius XM news over at Siriusbuzz, does an absolutely exceptional job evaluating the company. Take a look at his most recent article here at Seeking Alpha. In it he discusses appropriate valuations for Sirius XM using an EV/EBITDA model according to how Sirius XM has traded in the past. Spencer knows more than me about how to calculate Sirius XM's value based on this multiple. Me? I defer to him. I know 'nothing' as the saying goes. But I can certainly match up his multiples with my projections from early in 2013 as to where share pricing should be today.
That price? $4.25 being my current fair value by the end of January. Take note of Spencer's price points. $3.85, $4.18, and $4.42. If these numbers sound familiar to those who have read my articles, it's because they are just about the three prices I have given for some time now. $3.85 support in January, $4.25 fair value, and $4.50 peak. From the article above :
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.
I have considered the end of the year at January LEAP expiration for options since that is how I choose to invest in Sirius XM. 10 days remain. My reasoning for the estimations has been a mix of fundamentals, citing continuing company performance of meets or beats on guidance, and a mix of technicals citing the trend Sirius XM has followed since Liberty Media began buying shares for control of the company back in 2012.
Understanding both Spencer's EV/EBITDA calculations, as well as my technical chart above, is imperative to understanding good points for the investor to add to his or her position in Sirius XM. Keeping an eye on fundamentals and company performance is critical, and so long as things remain reasonably close to expectations (and they certainly have) then advantage can be taken when Sirius XM goes on sale. Buy Sirius XM below the 50 day moving average, right? You've likely heard me say that many times before. If you're looking to sell? Add about 40 cents to that average and there's your exit point.
When Sirius XM goes on sale is where the "I'm smarter than the market!" guys come in. For the informed investor, these guys are your best friend. Those who read my articles will remember Mr. Nino90nino who has a very long history of comments on Sirius XM. He held until Liberty got into pursuit of control of Sirius XM and then subsequently went short near $2.40. Shares immediately took off and a year and a half later remain 60% higher. Comment history shows he was a perma bull and then later turned perma bear on Sirius XM overnight, finding every possible reason to reinforce his bearish position. Eventually he stopped commenting completely. I've noticed that often happens when investors turned traders have trades which go horribly sour.
There's a guy that posts over on the yahoo boards by the name of 'cashbar1.' Super bull on Sirius XM up at $4.18 before the Q3 call. Held down to $3.50 and sold out. After that? In his eyes all longs were stupid and ignorant. Repeated postings of 'the 4 stages of trading' were supposed to reinforce his decision, suggesting current investors were in stage 4, denial.
But the market needs those types. Investors need the sellers out there to pick up good deals, and that smarter than the market guy that emotionally flip flops? He's your best friend, even if he may annoy you while the share prices drag around near a bottom.
What's the point?
For those who have been paying attention, Sirius XM has been undervalued for a considerable length of time. Reaction to the Q3 call was overdone. Liberty has taken advantage of this and played the overdone drop in Sirius XM's value relative to Liberty Media into a lowball offer for the rest of the company in an equity swap.
In short, it has been below the 50 day moving average, well outside the established trend of appreciation, and has been an absolute steal at recent prices. It doesn't matter how you look at it. Consider Spencer's EV/EBITDA evaluation, and Sirius XM was undervalued. Consider my technical chart and Sirius XM was undervalued. Consider the fundamental story of Sirius XM which has continued to reasonably meet or beat guidance, and Sirius XM was undervalued.
Just don't be a fool and look at "P/E ratio." If there's one guy I always know more than, it's the guy who uses P/E as an arguing point for or against a company like Sirius XM.
Selling out at $3.80?
With the recent news of Liberty Media's offer, I believe some individuals are short changing themselves by selling out. I will never bear a grudge against those who wish to take a profit, but investors must understand that the offer by Liberty Media is a low ball offer at an undervalued price for Sirius XM. Of course, Liberty will not say this. Consider if you are making an offer for something, do you tell the seller your maximum or minimum offer to start?
I believe selling your shares to be a mistake. Taking a mere 12 cents above the offer's valuation based on the ratio at the time is selling out near where I feel the bottom of current valuation should be. Certainly $3.80 is better than $3.68, but do long time investors truly believe that $3.80 represents an appropriate valuation for Sirius XM today? Other than the Liberty offer, is there anything which has fundamentally changed now versus 3 months ago, other than the share price, which makes $3.80 an attractive sell point when above $4 was not?
Sure, sometime in the future a deal may be voted on which sets an exchange ratio and thus price for Sirius XM to be absorbed into Liberty Media. But until that time, it's important to understand the worth of what one owns. It's important to continue to understand the fundamental story of the company. It's important to keep an eye on everything you did before the offer, and accept on a sale only what you truly believe your shares to be worth.
For me, I need a valuation near recent highs over $4 to even think about voting yes on Liberty's offer. I don't think investors should settle for less. The company is undervalued at $3.68 and still undervalued near $3.85.
Thanks for selling.
So what of the recent sellers? The ones who suddenly enter a frenzy of posts suggesting people dump their shares, sell out, move on, or look elsewhere for opportunity?
Here's the way I look at it...
That's one less 'Yes' vote to Liberty's offer. A buyer here (that guy you just sold to) with a deal on the table is aware of that deal and is highly unlikely to vote yes near current pricing. Because of this, and because I am a 'no' vote on the current offer, please feel free to sell your 'yes' to someone who will vote 'no' like me. I was a buyer in the $3.50s for my monthly purchases in November and December and January because I know what I feel is a fair value for my shares, and that fair value is not $3.68, that is for sure.
Am I smarter than the market? Nope. If I was I'd flip Sirius XM around daily and make a small fortune on the pops and dips. But I'd like to think I am smart enough and have enough information to form a plan, understand the company and the space it operates in, and understand its worth so I can make good decisions.
Did I expect an offer by Liberty Media when I made my purchases at $3.50? Absolutely not. I didn't even expect share pricing to drop as low as it did recently. But like Liberty I saw relative value in the shares at that price point.
Liberty has tipped its hand here. Understand the idea of a low initial offer. Understand this will very likely be increased, and more than 12 cents beyond $3.68. If you've been long Sirius XM for a considerable amount of time, I believe selling out now to be a mistake.
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 January 2014 $2 and $3.50 calls.I am long SIRI January 2015 $2 and $2.50 calls.