Not long ago, I wrote an article about Sirius XM Radio Inc. (SIRI) and in it, I discussed the difficulty SIRI would have moving above $2 and $2.50 in a timely fashion (I believed that option premium would decay faster than a price rise).
SIRI has now fallen and stayed below the magic $2 for the week’s trading. While the overall market is down this week, SIRI is now down about 25% off the highs put in last month. Pandora (P) just had its dismal IPO, and is currently trading below the offering price. This should provide little solace to SIRI investors, as P is not alone in competing against SIRI, and the price of the stock should not be a reflection of the real headwinds SIRI faces. With a sky-high triple digit PE ratio, SIRI is being priced like a high growth company without any track record of high growth (or the prospect of gaining high growth) that justifies investment at the current trading price.
I believe the leading reason SIRI’s stock price is as high as it is results from the sure magnitude of the retail investment commitment. This can be seen easily in the comments in SA articles, as well as on the popular boards. No other stock which I have been critical of investing in has drawn the ire of investors like SIRI, and that says a lot considering most of my articles are about popular, heavily traded stocks that I believe to be overbought. On the other side of the retail trader coin is the over 8% short interest. This is unusually high, and especially so for a low price stock, unless shorts believe very strongly in the stock having a valuation that is much higher than the company should warrant.
The recent dip in price should not be viewed as a buying opportunity, but rather a warning to those that have not given proportionate thought to the risk a sub-$5 stock brings to a portfolio. I believe it is important to note that a cheap price does not directly mean a value, because it is all relative to what a share gets you. In the case of SIRI, it buys a company where if the profits double, the PE will still be in or near triple digits and the profit will be about $0.02. Not really all that inspiring when put in those terms.
I believe the best use of capital with SIRI is being short by selling the $2.50 call options. QE2 is likely to not be replaced, and if it is, it's not likely to be of the same magnitude. Considering the chart with Ford (F), we can also see that the bread and butter of SIRI -- new car sales -- don’t appear to be on a growth trajectory. Remember that SIRI is priced with an expectation of fast-growing revenue, and more importantly, the bottom line profits. Without growing new car sales, it is difficult to imagine a scenario that SIRI beats and guides higher.
There is a reason SIRI fell back under $2, and it is not because sellers want to give away free money. It is because they don't want to be bag holders for a company that has a long history of "almost" being profitable while losing money. Don't you be a bag holder either.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.