Short Sirius XM: Distinguishing Between the Company and the Stock

| About: Sirius XM (SIRI)

Much has been said about the well publicized pre-announcement trading strategy on Sirius XM (SIRI). I first wrote an article to outline what we have come to know as a rise leading into earnings and a post-earnings sell-off. During the entire month, we chronicled the stock’s progress and adjusted our predictions as macro conditions dictated, but while holding firm to our original theories.

During the entire month, everything happened according to plan and the strategy was executing beautifully; much better than I had anticipated. By Monday afternoon 5/2, I disclosed to readers that I had sold my position at a price of $2.02 to keep in-line with my own advice. Then, in what seemed like a matter of minutes, SIRI dropped from $2.03 to $1.90, or almost 7% just before noon; I was the smartest man alive according to several emails. As written, there it was, the decline at the peak of the day before the announcement that we had predicted.

Tuesday morning arrived. As customary, I read SA’s Wall Street Breakfast to find out what the futures were doing and to get an idea of the ratio of earnings misses from the day prior. By 7 AM I read the press release where Sirius reported earnings on the PR Newswire. The headline read with the bullets to follow: SiriusXM Reports First Quarter 2011 Results

  • Subscribers Reach New High of 20.6 Million; 373,000 Net Subscriber Additions in First Quarter
  • Revenue of $724 Million, Up 9% Over First Quarter 2010
  • Record Adjusted EBITDA of $181 Million, Up 15% Over First Quarter 2010
  • Free Cash Flow Improves $110 Million Year-Over-Year

Seeing the headline told me all I needed to know and to come to the conclusion that I missed it and sold too soon. Watching pre-market activity gave me the indication that maybe I was right when the stock hit $1.86. But then, as my fellow contributor Rocco Pendola put it, Mel Karmazin talked and Sirius surged. Mel said the following:

We are very pleased to report another strong quarter of subscriber revenue and adjusted EBITDA growth together with improving margins and increasing cash flow. We added 118% more subscribers in Q1 2011 than in Q1 2010. Net subscriber additions of more than 373,000 represented the strongest first quarter subscriber growth in the 3 years since Q1 2008.

That was all investors needed to hear to realize that this was no longer your cousin’s Sirius XM. By 10 AM, not only did the stock surge upward, but it sustained its gains throughout the day as well as the days that followed. The net result was I was the biggest fool on this planet. This, according to the same emails that once proclaimed my brilliance. So let me get this straight, the articles were brilliant in that they served to help readers lock in gains, but I was also a fool for writing them because the gains that they helped you acquire were not as big as they could have been? On some level, I suppose that makes sense.

To those readers who likely missed out on some additional gains due to the stock not selling-off, I want to say I humbly apologize. To those that held throughout the earnings call, congratulations. For Sirius, this was a new era of solid earnings and sustainable growth. This is also a signal that there may be a need for new trading strategies. As is customary, I sought to give credit where credit was rightfully due, on Sirius and to the investors who stuck by them.

Moving forward

When I announced that I had sold my Sirius position, I also disclosed that at some point when valuations justifies me to do so, I would consider establishing a short position on Sirius. This obviously struck a nerve with many readers as the hate mail persists. But I feel I need to clarify some things on this point and as it relates to my views on trading in general.

Warren Buffett once said that “investors should buy companies, not stocks”. I feel the need to introduce this quote because there is - and should be - a clear line that distinguishes between the two. And often, if the line is not clear, it results in drastic emotions that cause investors to do and say things that they would not want their own children to do or repeat.

Investors have a knack for piling into investments at the top and selling at the bottom. Many get caught up in media hype or fear and buy or sell stocks at the peaks and valleys of the cycle. This makes me think of another Buffett quote where he says, “we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

I say this because since there is an over-exuberance in the market and in SIRI at the moment; (notice I didn’t say Sirius XM), I have always known how to separate and make a distinction between Sirius and SIRI. Contrary to what you may believe, the terms are not the same nor should investors approach them as if they are.

Sirius the company is Mel Karmazin, David Frear, Howard Stern, Tim McGraw, every NFL broadcaster, Martha Stewart, Dr. Laura, the dog etc. Those are all faces that I associate with the company. Mel Karmazin’s bio has all of the evidence needed to feel very confident about Sirius’ management and its future. I love the product and I have it in two vehicles as well as an internet subscription. I would literally go berserk without my SatRad if forced to be without it. It pains me to leave my car and having to turn it off, so I bought the boom-box to keep at my office desk. It's a beautiful thing, but the attachment is really sad; at least that's what my wife says.

SIRI the ticker, on the other hand, does not have a face with which to associate a personality. It is simply four little characters (a commodity) that is traded on the stock market. It scrolls on a tape from time to time (just not on CNBC). At times it goes up and at times it goes down; all the while, without ever having to explain to anyone where it’s been. Its direction is often either fundamentally related, psychologically impacted and technically scrutinized. Its value is based upon certain criteria outlined by those conducting the transactions.

I will be long on SIRI when the opportunity is there and I will be short when the valuation tells me to do so (as it does now). But shorting “SIRI” does not mean I don't value “Sirius” the company nor does it imply that I have little confidence in the people that operate its business. I can have ultimate faith in Sirius XM without having equal faith in the psychology of investors; a by-product of SIRI’s stock valuation. Instead, what it means is that I believe in the metrics used to evaluate stocks; plain and simple.

My confidence in SIRI’s stock at $1.65 cannot be the same confidence at a price of $2.23. Logically, for me that is just not possible. But then again, I’m a trader. Sirius XM the company is going to be a superstar for many years to come, but it does not mean SIRI the stock should be bought at each 52 week high, as has been the case. I am now short SIRI until valuations and fundamental metrics tells me I should be long. It helps to know the difference between the company and the stock.

Disclosure: I am short SIRI.