Sirius XM Is a Purely Speculative Bet

Apr.26.11 | About: Sirius XM (SIRI)

Recently, I shared my views on 4 stocks and 2 commodity ETFs to avoid for now. While I was expecting the highest interest from Gold (GLD) and Silver (SLV) holders, to my surprise, Sirius XM (SIRI) took the most attention. Therefore, I decided to open the Pandora's box, and thoroughly explain why Sirius XM is a purely speculative bet which should be avoided in a long-term oriented portfolio.

Sirius XM has a price-to-book value ratio of 36.60. Although book value is not a reliable indicator in today's accounting standards, P/B ratio of 36.60 shows Sirius XM is extremely over-priced. Sirius XM's balance sheet lists $2.35 billion of current liabilities, whereas the current assets amount to only $972 million. The current ratio is 0.42, and level of financial leverage is one of the highest in Wall Street. With a financial leverage ratio of 35.56, Sirius XM is in serious debt. For each dollar of short-term debt, Sirius XM has only 42 cents. On top of that, Sirius XM's balance sheet includes $2.629 billion of intangible assets, and a goodwill of $1.835 billion. Only 40% of Sirius XM's assets is tangible.

Next warning signal on Sirius XM is the insiders' transactions. Sirius executives own approximately 63 million shares. While this might look like a good signal, insiders have been selling their shares for a long time. In the last 6 months, they reduced their ownership by 20%. Besides already awarded shares, insiders also have access to significant amounts of derivative securities. Some of these securities are priced with insanely low levels. Last month, Holden, one of the directors, acquired 425,118 shares, 53,559 shares, and 13,493 shares for prices of $0.14, $0.35, and $0.54, respectively. What was his next move? Holden instantly sold his shares for a price of $1.8 per share, making a profitable transaction.

Howard Stern, Sirius XM's flagship, turned out to be the biggest threat to the future of the company. According to Stern's lawyers, "Sirius XM was supposed to pay Stern's agent, Don Buchwald, a consulting fee of 10 percent". While Stern's lawyers are asking for more, Sirius XM's long-term shareholders experienced significant losses since Howard signed his first contract.

Sirius XM's business-growth model is not sustainable. The company concentrates its main efforts on adding new customers. However, sooner or later, the customer attrition rate will balance the new customers. $156 a year amounts to $1560 a decade. There are many free alternatives to Sirius XM. Anything that can play music could be a serious threat to Sirius XM, including-- but not limited to-- iPhone, iPod, internet radio, local radio, am radio, and cable radio. My favorite alternative is Win Amp. It does not require a receiver, and it offers thousands of global music channels - many of them for free.

While I would not add Sirius XM to my long-term investment portfolio, it can enter into my speculative bets. Institutions own only 30% of stocks. Recent experience shows that investors are extremely bullish on Sirius XM. I am not in favor of technical analysis, however, it can work on Sirius XM, given the high concentration of small shareholders performing transactions based on social networks. As can be seen in the graph, the shares experienced a double cap, finally breaking the $1.9 resistance with large momentum:

Sirius XM - Bullish Sentiment

For such speculative shares, instead of profits players tend to believe in other indicators, such as the number of users, or average revenue per user. Surely, Sirius XM's management knows how to emphasize these "unconventional metrics" as strong indicators of their success. According to the behavioral finance theory, Sirius XM's small shareholders are 'mimicry' investors, showing extreme optimism or pessimism. It was this behavior that drove the prices to 9 cents in 2009, and raised it back to almost $2 in a remarkably short period. This herding instinct and noise trading forms the theoretical basis of technical analysis. Sirius XM broke the double resistance levels with a strong upside movement of 5% in the last two trading days. How far and how long this momentum will continue depends on players' psychology. Experience shows that the previous peaks might act as both target levels and strong resistance points.

Summary

While Sirius XM is a purely speculative stock, it has extremely bullish investor sentiment behind it. The prices might go up and down in an unexpectedly short amount of time. If you are a professional investor talented in analyzing intraday movements, it could be a good play for the speculative portfolio. I strongly recommend placing predetermined stop-loss levels to avoid large losses.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SIRI over the next 72 hours. I might initiate short positions in Sirius XM as well.