On more than one occasion, possibly on more than 100 occasions, I have been accused of having a hidden agenda and/or being a party to the manipulation of the price of Sirius XM Holdings (NASDAQ:SIRI). This is partly because I write so frequently on Sirius, but I have also earned similar comments on articles I have written about another low-priced stock - Capstone Turbine (NASDAQ:CPST). I would often respond that it is silly to think that I, a blogger that hides behind a turkey vulture that goes by the pseudonym Crunching Numbers, could hold such power. After all, with Sirius, we are talking about a stock with a market capitalization in the billions of dollars that trades tens of millions of shares daily and is a component of the NASDAQ 100. Perhaps the accusations relative to Capstone would seem more justified. It receives far less coverage than Sirius, has a current market cap of less than $0.5 billion and most of the time will trade less than 5 million shares per day. Simply on that basis, I suppose the potential to move the price of Capstone would be greater.
I now must confess. Academic research may have proven that I do, in fact, have such power. And, it appears that more research is on the way. This week I received the following request in my Seeking Alpha inbox:
Dear Crunching Numbers,
We are an academic research team of graduate students and professors at University of California, Santa Barbara, led by Professor Ben Y. Zhao (www.cs.ucsb.edu/~ravenben/). As part of an ongoing research on online investments and user-contributed content, we are conducting a survey of investors using SeekingAlpha. The results will be published at academic journals and conferences. We hope you can help our study by answering several quick, high-level questions about investments (no detailed questions on specific stocks or holdings). It will take at most 1-2 minutes.
We guarantee all your information will be anonymized, and our research only reports aggregated statistics. Your can directly reply to this message with your answers, or take our survey on SurveyMonkeywww.surveymonkey.com/s.aspx?sm=e2eRenJsW....
Thank you so much for your time. ...
2.Do you think SeekingAlpha articles can impact the future movement of stocks they focus on? ( )
3.How often have you seen articles on SeekingAlpha that looked like they were heavily biased, written with the intent to manipulate a particular stock (to move its price up or down)? ( )
Sandlab, UC Santa Barbara http:/sandlab.cs.ucsb.edu/
I left off a couple of questions about my investment experience and the forums I would use if SA did not exist, but thought my accusers would find questions 2 and 3 above quite interesting. If they had been given the chance to take the survey, they would likely answer each by selecting A. And, as many readers of my articles would suspect, since I rarely respond to comments with one word answers, the likelihood of my responding to a survey that would require I distill my views to a single letter would be close to zero. However, since I am also the parent of graduate student conducting research, I am somewhat sympathetic to their efforts.
So, instead of treating this as a multiple choice quiz, I responded to it as I would an essay test. I responded to the researcher that she should look at my profile to answer her question about investment experience. For the last question about what forum I would use if SA did not exist (it listed four with a fifth option to fill in the blank labeled "other"), I responded that I might not even continue writing. (Did I just hear several folks break out into applause?) I certainly wouldn't use StockTwits or Twitter - the idea of trying to cram my thoughts into those character-constricted limits is appalling. It takes me more space to say hello. Yahoo? Way too much chaff to sift through to find the few bits of wheat. Besides, none of these provide compensation. The Motley Fool? I considered it, but there are too many restrictions on writing style and content. I have been asked to write for other outlets, but have declined to do so at this point and wasn't about to explore potential compensation at various other outlets.
I found the structure of question 3 overly complex. I frequently see articles by others that are heavily biased (it is clear that mine are the exception with a balanced presentation - a little humor folks, so calm down and finish reading this article before flaming me with your comments). I expect a biased presentation. It seems most of the authors I have read are presenting a buy or sell thesis and providing information to support that position. But why would anyone ask me to interpret the motive or intent of others? I have never claimed to be a psychic. Even if I thought others might be trying to manipulate the price of the stock, why would I want to accuse SA of being complicit in a potentially illegal activity?
Back to question 2. "Do you think SeekingAlpha articles can impact the future movement of stocks they focus on?" Until recently, I thought the idea was preposterous. It's extremely rare that I uncover meaningful non-public information, and if it is public information, the efficient market theory would suggest that the content of any article I write has already been priced into the shares. In addition, as a firm believer that the price of a stock will eventually be based on the present and future performance of the company, any possible short-term move should be transitory and irrelevant to long-term investors.
Nevertheless, an academic research paper implies that I may hold the power to move the price of the stock. The paper, "Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media," examines the relationship of share prices to articles. Before going a bit further into the paper, it is useful to focus on the first three words: wisdom of crowds.
I first became aware of this phenomenon within the past couple of months when my daughter brought it up in a conversation following a story she heard on NPR. The story was mainly about how ordinary people were able to make accurate predictions about world events:
According to one report, the predictions made by the Good Judgment Project are often better even than intelligence analysts with access to classified information, and many of the people involved in the project have been astonished by its success at making accurate predictions.
But what stuck in her mind was an incident that occurred more than a century ago:
The wisdom of crowds is a concept first discovered by the British statistician Francis Galton in 1906.
Galton was at a fair where about 800 people had tried to guess the weight of a dead ox in a competition. After the prize was awarded, Galton collected all the guesses so he could figure out how far off the mark the average guess was.
It turned out that most of the guesses were really bad - way too high or way too low. But when Galton averaged them together, he was shocked:
The dead ox weighed 1,198 pounds. The crowd's average: 1,197.
I shrugged off the dead ox anecdote as a nice little story and thought little more about it until I came across a reference to the academic paper and its examination of Seeking Alpha. I was astonished (like those at the Good Judgment Project) by its findings. The abstract concludes:
We find that the views expressed in both articles and commentaries predict future stock returns and earnings.
The paper discusses the rise in importance of social media and peer-based advice, including financial web sites. The objective of the study was to determine if such web sites could be found to have predictive capabilities. The paper states Seeking Alpha was chosen because of its popularity, noting:
As of August 2013, SA had between 500,000 to 1 million unique visitors per day (comScore - ScorecardResearch) and, as such, was one of the biggest investment-related social-media websites in the United States.
The paper covered a study period from 2005 through 2012 included "SA articles and SA commentaries ... written by around 6,500 and 180,000 different users, respectively, and cover more than 7,000 firms." Most importantly, the paper found that:
...we observe that the fraction of negative words contained in SA articles and the fraction of negative words in SA comments both negatively predict stock returns over the ensuing three months.
and a footnote adds that the views also predict results "over a one-month, six-month, one-year and three-year horizon."
More importantly for those reading this article, and especially for those writing comments, the study observes:
If opinions expressed through SA were unrelated to firms' fundamentals, or if the information was spurious and already fully incorporated by financial analysts into their reported EPS forecasts, then no association should be observed between our earnings-surprise variable and our measure of peer-based advice. In contrast to this view, we find that the fraction of negative words in SA articles and comments strongly predict subsequent scaled earnings surprises. Given that earnings are unlikely to be caused by SA users' opinions, the earnings-surprise predictability suggests that the opinions expressed in SA articles and comments indeed provide value-relevant information (beyond that provided by financial analysts).
Try not to get too hung up on the phrase "negative words." It is part of the algorithm used to evaluate relative - as opposed to absolute - frequency of the words compared to more traditional news sources. And for those that really want to understand more about the study, read the full paper.
What it means to me is that when I write an article, and inspire comments, I have the potential to cause a movement in the share price. How? Back to the efficient market theory. It should be possible for those using computerized trading to use the methodology in the paper to develop a program that looks at my articles AND YOUR COMMENTS to predict future prices. Taking advantage of this information, it would seem that the computer could execute buy or sell orders to quickly bring the share price in line with the future expectations.
Try to keep in mind that the "manipulation" would only compress the time frame of the price change, and that the fair value point - either higher or lower - that would be reached more quickly would have been reached eventually. So what do I really think of these two low-priced and very different stocks? I currently maintain long positions for both companies.
Capstone or Sirius?
I think that Capstone has the potential for greater appreciation at this time. It also carries more risk. For those that think Sirius has taken a beating since it reached a high of $4.18, look at Capstone that now sits below $1.40 after reaching $2.60 earlier this year. Capstone has just ended a horrible year in terms of using up cash, diluting shareholders, missing revenue guidance and violating its debt covenants.
It does however have a record backlog. If, and it remains a big if, it can manage to achieve revenue levels indicated by that backlog, it stands a reasonable chance of getting to EBITDA breakeven sometime during its current fiscal year which ends March 2015. That would be a major breakthrough, and I would expect the market to drive the shares up nicely. The risks are also significant. The company's business relies on distributors, their financial health, and their ability to maintain creditworthiness. Not only is Capstone's business highly concentrated in a very small number of those distributors, one of the larger ones is in Russia, where geopolitical risks remain high due to the tensions in the Ukraine.
Sirius, on the other hand, with its broad US customer base, long-term contracts, highly predictable revenue stream and solid free cash flow carries less risk. It does not face the problems caused by a potential Russian sanction or a harmful bankruptcy by a single customer. The risks here are more about valuation and the rate of growth.
I expect Sirius to continue increasing its free cash flow, but my concern would be how quickly it will grow relative to market expectations. Already I have seen what I consider weak ARPU metrics, weak new car conversion rates and weak net adds in the first quarter. It is not clear to me whether this is indicative of an underlying trend or not. On the plus side, as recently as Monday the company essentially reiterated its 2014 guidance at its annual meeting; guidance that called for subscriber growth of 1.25 million, revenue of more than $4 billion, Adjusted EBITDA of $1.38 billion and FCF approaching $1.1 billion. (And not to disappoint those looking for my cautionary tone, the company has not increased any of its guidance metrics, something it has done frequently over the past several years.)
The analysis of articles and comments published on SA shows a high correlation to future share price actions. To the extent that investment firms are able to quickly analyze the sentiment in those articles and comments and take advantage of share price dislocations with large trades, my articles and your comments both have the power to move the share price. While I don't consider this manipulation, I can see where others might come to that conclusion.
I repeat that the movements would only be temporary, as the wisdom of the crowd is only synthesizing all available information, information that would eventually come to light and/or be reflected in future company performance. My actual response to survey questions 2? Here it is:
2. I originally did not think so, and to the extent that I am an investor that strongly believes that the fundamentals will eventually determine the price of the shares, the answer would be no as it relates to the long term movement of the share price. However, this academic paper papers.ssrn.com/sol3/papers.cfm?abstract... clearly indicates that there is a high correlation between the articles and comments at Seeking Alpha and the future direction of share prices. The introduction concludes: "We find that the views expressed in both articles and commentaries predict future stock returns and earnings surprises."
So, to the extent that I believe in an efficient market, and to the extent that the material covered in this study can be programmed into the algorithms used in computerized trading, I would now conclude that my articles and the reactions they engender can move the price of the stock over the near term ,
And, as I am sure many of you have already guessed, it took far longer than "at most 1-2 minutes" to complete the survey.
As you get ready to make comments, consider that you also will be helping to predict share prices. That is, of course, unless unscrupulous individuals decide to lace their comments with certain words in an effort to manipulate prices.
Disclosure: I am long SIRI, CPST. 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 have maintained long positions in both stocks for extended time periods and will also frequently trade both stocks. I have $3.50 and $4 January 2015 covered calls written against a portion of my SIRI position.