Sirius XM: Focus And Discipline Is Required

Feb.17.14 | About: Sirius XM (SIRI)

I often sit down to write, and in the middle I abandon what I am writing and choose to do something else with my time. Why? Because I find I am often repeating myself. How many times can you suggest that a stock is a good buy? How many different ways can you say it?

Sirius XM (NASDAQ:SIRI) has been my only holding for quite some time now. Last year my investments in the company through options provided me with a return of around 70%. At times during the year I was looking at paper profit of over 100%, and at times I was looking at paper profit of around 40%. This is discounting the immediate period after entering my position.

Carefully considered

While I may appear casual and carefree on the surface, there is careful consideration put into my choice of investment. Buying into Sirius XM earlier in 2013 by purchasing January 2014 $2 call options involved a decision making process which considered both the highs and lows of where I expected Sirius XM might trade given a host of best and worst case scenarios from fundamental and technical perspectives.

Examining the charts from the depths of 2009 to the recent highs, and coupling trends and historical trading ranges with my fundamental view of the company, I established a range of price expectations before establishing position. $3 at the low, and $4.25 at the high, give or take 2% either way for January 2014.

I arrived at those price expectations based on a host of factors. Technical trends, a gap in price from the close of 2012 to the open of 2013, and most importantly where Sirius XM has historically traded based on fundamentals using the EV / EBITDA calculation. The share price did not reach my high target or low target, but given the range of trading came reasonably close to both.

Each earnings call I listened to the fundamentals and periodically I would reassess my evaluation of how I thought the company was performing relative to my expectations. Did Sirius XM deviate considerably from those expectations? If the answer was no, I'd hold. If the answer was yes, I might sell or buy more as the case may be.

Obviously the answer, to me, was always no, the company did not deviate. While there were some announcements by the company such as the acquisition of Agero's connected vehicle division and an agreement to repurchase a large number of shares from majority owner Liberty Media (NASDAQ:LMCA), these were not moves which altered Sirius XM's story, to me.

Does it matter?

For example, does it really matter where shares are repurchased from? Perhaps in the short term, a repurchase from the street serves to bolster share price versus repurchasing from Liberty Media, but the end result is the same which is a lowering of the outstanding share count and an increase in ownership percentage each share represents. Was the purchase of Agero a massive fundamental change? Perhaps in the future it will be, but for now I expected it would be almost a wash on acquisition. Certainly it was nothing that would suddenly alter my opinion of Sirius XM's long term trajectory.

The point is I am investing in Sirius XM and not trading it. Recently Liberty Media has made an offer of an equity swap for the rest of the company. Does this change Sirius XM in any way, or is it just an offer? Think about it. Arguably if one expects the deal to go through then the matter becomes extremely complicated. One must understand both Sirius XM and Liberty Media, valuations, expectations of 'the deal' and if one believes that deal will be sweetened for current holders of Sirius XM. Certainly a deal going through would change the fundamental story of Sirius XM.

It's not a sure thing

But the deal has not gone through, and I am not convinced the deal is even close to a sure thing. Because of this, I am comfortable investing in Sirius XM and even adding to position in a time of uncertainty which Liberty's offer has created. Consider the EV / EBITDA calculation mentioned above. Spencer Osborne here at Seeking Alpha has been my go-to guy for this calculation for a long time now. Look at his comment in his most recent article.

I look at the EV/EBITDA multiple. That multiple sits with comfort at about 19 or 20. It can pop to 23 or so, and it can dip to 17 or so. Most of the time it is at about 20.

The multiple currently sits at about 17.30 with the stock price at $3.56

This represents the low end of the scale.

A 20 multiple places the share price near $4.25. Thus I view current pricing as an excellent buying opportunity because I feel nothing has been significantly changed regarding my perspective on the company at present and in the foreseeable future. I am completely discounting this "deal" from Liberty as I do not think it will pass in present form, and I do not think a counter offer can be made that will both pass a 50% of the minority vote by holders of Sirius XM and subsequently pass voting by the holders of Liberty Media. There is not a lot of room for negotiation here and for the time being it may be best for each side to just walk away and move the deal from the table, to the shelf.

There have been a considerable number of investors who have sold out of long time positions due to the recent declines in share price, and the recent offer by Liberty Media. I've seen few who have sold out because they have decided that the company, Sirius XM, has flaws or faults which damages it, and thus damages their price expectations going forward. These sellers have assisted the decline in share price and have provided an opportunity to enter an investment in Sirius XM near or even below an EV / EBITDA calculation of 17. For me to enter here, I have to be willing to say that sellers are 'wrong' in their assessment. So here it is...

They're wrong.

Leveraged play

My play for 2014 is as follows, and is quite simple. I am long January 2015 $2.50 option calls for the majority of my position, entered into in two purchases in January and February at an average cost of $1.07 per contract. I also own $3 and $3.50 strike calls in smaller amounts. I am looking for a min / max range of pricing over the coming year between $3.50 and $5 per share and I may convert these long calls into call spreads with a $5 cap if favorable pricing presents itself. Downside risk? Loss below $3.57 and total loss at $2.50 or under. Upside potential? Gain above $3.57 at just under 1% per penny, with a double, or 100% at $4.64.

Aggressive strategy

Certainly this strategy is aggressive but I assure you it comes after careful consideration of the company and careful discounting of what I consider to be short term noise. That short term noise includes disingenuous downgrades by analysts who then proceed to use resulting weakness in the share price to buy on the dip (yes I am looking at you, Goldman Sachs.) My recommendation to buy at or below the 50 day moving average for a more simplistic approach still stands, and I think investors will find attractive prices at or below that level throughout the coming year.

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 Sirius XM January 2015 $2.50, $3 and $3.50 calls which I may at some point convert to spreads with a $5 cap.