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Something occurred this week with Sirius XM (NASDAQ:SIRI) that flew completely under the radar: Nasdaq released its bi-monthly short interest report and Sirius posted another 3% gain in that “infamous” category. I previously mentioned that being short Sirius is not the most popular thing to do. I said this because being short Sirius is viewed as a crime against humanity, one that is said to be punishable by death. But if this is the case, I suspect the crime rate should be going up drastically because each passing month seems to attract more shorts to the stock.

I was considered evil by readers for having taken a previous short position on Sirius, one that I opened at a price of $2.11. This started the onslaught of hate mail that continues even today. As the price spiked up uncontrollably recently, I averaged up to a position at $2.17. I was fortunate enough to cover last week at a price of $2.12 for a modest 5 cent gain; and this was in the face of the stock reaching $2.42. So now, according to readers, not only did I commit the crime of shorting Sirius, the infraction appeared more heinous because I profited from it.

The question is, if I was able to profit off of my short position, why does the notion continue that shorts are somehow losing? The answer is simple: They are not, and investors need to get used to it. I say shorting Sirius is not popular, yet the level of popularity tells a different story according to the numbers released this week by Nasdaq. For the sixth reporting period in a row, Sirius's short interest has risen from the previous report of 278 million to almost 290 million, as illustrated in the graphic below.

Click to enlarge:

Short Interest 5-13.PNG

I asked this question before: All of these shorts can’t be fools, can they? How is it that the share price keeps going up in conjunction with rising short interest? Each time Sirius sets a new 52-week high in share price, we subsequently learn that it has also set a new 52-week high in short interest.

short range.PNG

The graphic above tells it all. I would have to think that this dispels the theory of “short squeezes” to some degree, does it not? Because if the share price keeps rising in unison with short interest, with an average of double digit swings, it is clearly possible for a short to cover with a sizeable profit.

I think my trade was evidence of that. The graphic shows that the stock has climbed 40% in value while the short interest numbers have increased for six consecutive reports. To me, there is an obvious disconnect in both theories that shorts are losing and the existence of a short squeeze. How can either be proven? If they can’t, why are the theories so popular?

The answer

Sirius does not trade on its fundamentals. Based on my methods of evaluation with regards to its metrics, it has not done so over the past two quarters. This can be both a good and a bad thing for the stock. I wrote earlier this week that Sirius is no longer too expensive and suggested that its forward P/E now approaching 40 may not be as irrationally viewed as previously noted. On January 20th of this year, I added to my Sirius position when it traded at its low of the year at $1.49. I said then in a post that there was a great chance that the price could double this year. This outlook was fairly simple as I used historical prices based on known metrics. On January 20th, 2010 Sirius traded at a mere $0.73 and closed at $1.63 for the year; or 137% gain.

So while Sirius continues to not trade on its fundamentals, this will be the reason why the share price will likely see $2.75 to $3 by year’s end. Having said that, it is worth noting that Sirius’ fundamentals continue to improve year over year. So it seems a more than likely scenario that when fundamentals catch up to the share price, it will then present an increase in premium. As the share price continues to rise along with a decent degree of volatility, opportunistic traders will see a good short play, one that has been profitable for two years.

Summary

It is no secret that I have been one of the more conservative analysts towards the company for no reason other than the fact that in addition to technical information, I value fundamental analysis. The stock price had fallen out of favor with me for this reason, but as its trading range appears to have now emerged, it has started to regain some of its good standing, at least with me. I have always been an opponent of buying stocks at 52 week highs; and I will always remain that way. But considering where I suspect Sirius will be by the end of the year (likely $2.75 to $3), I am rating Sirius a buy at its current valuation.

Clearly, based of the information in this article, both shorts and longs have been highly profitable trading Sirius. I think it is time to put to rest the notion that shorts are losing as well as the idea that any price appreciation in Sirius is the result of a “squeeze”. The evidence is just not there.

Source: In Defense of a Short and Long Position in Sirius XM