Sirius XM: When Does This 'Thing' Get Out Of The Mud?

Apr. 3.14 | About: Sirius XM (SIRI)


Sirius investors have considered the stock to be a 'pig' for months.

Maintaining perspective on the company is key to purchasing in times of fear.

What started the decline may be coming to an end.

When does Sirius XM (NASDAQ:SIRI) get out of the mud? Perhaps as soon as 'today'.

Being April 3rd it's too late for an April fool's joke, even if Sirius XM's share price may have seemed to be playing an early trick on investors. Touching a low of $3.09 last week may have had some investors staring at a paper loss if they bought a year ago, in the middle of what has been a broader market bull rally. How in the world could this happen to a company like Sirius XM?

It can't be more sellers than buyers. Institutional data doesn't support a 25% drop in share price based on a net sale of millions of shares. It can't be an increase of short sale activity since recent history has shown that shorts have been buying and covering, even at higher prices than today except for the most recent data point. Could retail be running in droves? Perhaps. I certainly had my share of messages from former investors who said they were selling out or done with this 'pig' (that they formerly referred to as their 'SIRI girl'). Some were suddenly concerned about things that did not seem to matter to them before, as if a lower share price somehow made the perceived threat of Pandora (NYSE:P) or Apple (NASDAQ:AAPL) stronger.

It's human nature, especially during times of confusion and fear, to make up reasons for something or convince yourself that X happened because of Y. Reality is that most don't really know, but the mind needs something to latch onto. The mind needs something concrete so that the fearful can grab a hold and not float around in a stormy sea.

For an investor in a company it isn't easy when the share price deviates from our expectations, or drops near what we view as the absolute bottom of our expected ranges. The last thing you want to do, though, is conjure up a bunch of ghosts in your mind and allow them to scare you away from what you truly feel about the company. The share price at any given moment is a spread of what you can sell and buy the stock for. Nothing more, nothing less. 99% of the time it does not represent actual company value, but instead represents greater and lesser degrees of over and under valuation. Keep that in mind.

The key is in keeping your opinion of the company and the worth of the company as the rock you cling to in that stormy sea, so that you do not cling to whatever others are telling you or whatever is in reach. If you don't have that rock, I'd argue you are lost to begin with.

Before this turns into a psychology lecture, which I am certainly not trained appropriately to do, let's turn back to Sirius XM and why this 'thing' as people have been referring to the company, may be ready to move back into positive territory.

The market takes all types. Retail, institutions, funds, short, long, hedged, unhedged, traders, etc. all work together to make up the share price. That $3.34 closing price for Sirius XM on April 2nd? There were not enough sellers at $3.33 or not enough buyers at $3.34 to move the price up or down. That's it, and that's all. If you want to buy, you could have your shares for $3.34 or if you wanted to sell you could sell them for $3.33, up to about 2 million shares for each price at the close. There were plenty of shares available for most reading this article.

But what really moves the share price? What can change an overall trend? Let's go back to October of 2013 when this downtrend started and consider what, in my opinion, may have changed the positive trend Sirius XM exhibited since July of 2012.

Many will remember the October earnings call as not being all that bad, yet the share price was destroyed, shedding nearly 12% in just 3 days following that call and about another 15% since then. People scrambled for reasons, some citing 'slowing growth,' some citing increasing competition, and some citing just plain over valuation among other things. While any of these issues can be argued, I don't think any one of them was the main drag here, but I think one specific issue may have been.

That issue would be the forward purchase agreement entered into between Sirius XM and majority owner Liberty Media (NASDAQ:LMCA). While it was not stated that this would cease open market purchases by Sirius XM in its stated buyback plan until shares had been sold back to Liberty, that is what happened. Personally I can't fathom why the company would cease buybacks at lower share pricing that it found favorable to repurchase at previously, but that's what happened. Sirius XM halted its buyback program for the last 6 months after what was somewhat of a neutral quarter.

In the meantime Liberty Media made an offer for the rest of the shares of Sirius XM that had almost a 0% chance of being accepted, throwing a monkey wrench into everything, and then later removed the deal as I expected. Uncertainty and confusion never help, and I received messages from many long time (read: 3-, 4-, 5-year investors) who sold out on the offer. Those who attempted to play the arbitrage game? I warned about this, and that play had to be unwound after the offer's retraction, which meant additional selling in Sirius XM and the share price dropped again.

I figure at this point that arbitrage play is now unwound and the ripple effects from the unwinding should have had enough time to flow through. With that out of the way, all that remains is what I believe started the fall in the first place, and my expectations are summed up in a response to a reader last week:

I have confidence in SIRI. Honestly I wouldn't mind this dragging a few more days. I get my monthly cash available on Monday.

I figure things turn around when SIRI buys back from LMCA on the final portion and resumes open market purchases.

The final installment of the forward contract with Liberty Media will come in April, and it is reasonable to expect that if Sirius XM has not begun repurchasing shares again from the open market yet, that it is likely to do so following its repurchase and retiring of shares from Liberty Media. The resumption of what is essentially a $2 billion purchaser should bring interest back to the stock. For investors, the lower pricing means Sirius XM buys back more shares for less money, making the return of capital even greater over the long run. $2 billion buys a lot more shares at $3.50 per, than at $4.50 per.

And my reasoning ends there, because I am happy with, and see nothing wrong with, the company. Sirius XM chugs along, adding more and more subscribers quarter over quarter, year over year. It is able to roll through minor price increases which, as the subscriber base grows, are more effective in adding to the bottom line. And the company is able to offset higher royalty rates by passing these rates along to the customer in the form of a fee, rather than fully absorbing the impact by itself.

The completion of the purchase from Liberty and the initiation (again) of the public purchases in the buyback program marks the end of what I believe started this decline. Some will remember previously an event that caused a similar decline in share price, from $2.40 down to $1.80 when Liberty Media announced it had entered into a forward contract to purchase shares in pursuit of control of Sirius XM in May 2012. On completion of this forward in July of 2012 the share price took off. While it's a different situation, some may find similarities.

With all of that being said, this investor is sticking to the plan. Buy at or under the 50-day moving average and wait, so long as my perception of the company hasn't changed. I would continue to encourage others to do the same.

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 2015 $2.50, $3 and $3.50 calls. I intend to cap these positions, turning them into bull call spreads, depending on share price behavior through 2014.