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As in everything in life, sometimes we have to face reality or “the truth”. Jack Nicholson once poignantly proclaimed “you can’t handle the truth!” And he’s right! Sometimes it is just too much to bear; this is the reason why the famous mantra “ignorance is bliss” lives on. But this is neither acceptable nor mature for an adult to admit – frankly, it is embarrassing. The tooth fairy, Santa Claus, and to a lesser extent your religious preference are a reflection of your state of mind and “faith”. But are these acceptable grounds for making investment decisions?

“The truth”, as hard as it is sometimes to deal with, is that every once in a while investors have to look at themselves in the mirror and ask the question “Why?” And the very moment we don’t like our answers we change the logic to justify and/or rationalize our decisions. This is a psychological condition known as “cognitive dissonance”; or simply the idea that we will try rationalize even the most aversive conditions -- if we are forced to live with them.

Seeking Alpha contributor Rocco Pendola told me that I should stop talking about value. First he called me an “Apple (NASDAQ:AAPL) fan and proceeded to explain why my thinking was flawed in terms of valuation. Rocco wants investors to believe:

- Valuation and fancier terms like "financial metrics" mean little, if anything, in relation to the stock price. What counts is one or some combination of the following - potential, emotion and "the story."

- Low P/E ratios should not even enter the conversation. And even though, technically speaking, TSLA is overvalued, it means little because the long-term story remains intact, justifying today's somewhat lofty price per share.”

Rocco felt he needed to clear things up from what he thought was too much being made by another Seeking Alpha contributor Andy Zaky who wrote a brilliant masterpiece detailing precisely the opposite point of view. Andy said:

I cannot stress how important it is for investors to understand this concept. It is the most fundamental principle, the first axiom, the 1+1=2 foundation underlying the financial markets. Apple is not "given" a stock price based on its valuation. It trades at a stock price based on whether on balance; there are more buyers than sellers of the stock at a particular price point. Are more people convinced to buy the stock here at $343 a share or are there more sellers at this price level? The why, the reason, the logical argument doesn't matter at present value.

Andy is correct and Warren Buffett would agree. In fact, he said something very similar; “Price is what you pay. Value is what you get.” In order to realize value in equities such as Apple (AAPL) one has to make the decision to buy the stock as a long term holding in their portfolio. It matters very little how the price fluctuates in the short term. As part of the continual due diligence process, one MUST monitor the company’s fundamentals or “metrics” that affect growth and revenue in order to determine if the stock still qualifies as a good, sound investment. How does one know what a “good sound investment” really is If Apple does not qualify? It seems in Rocco’s world, P/E ratios have become some sort of offensive term.

Speaking of offensive, in a recent article he explains why he is bullish on Sirius XM. Just in case you missed it, let me say it again -- Rocco is bearish on Apple and Netflix (NASDAQ:NFLX) and bullish on Sirius (NASDAQ:SIRI); ladies and gentlemen this is not a typo. Only time will tell how things unfold. I can’t fault him for his stance on either company, but his reasoning has caused me to look in the mirror and ask myself that same poignant question – Why? But before my “cognitive dissonance” can kick in, I immediately turned away from the mirror, opened by GAAP book (doesn’t everyone have one?) and instantaneously my reality was restored. It gave me every reason to believe why Rocco was wrong and only distancing himself from reality or “the truth”.

I am long Sirius and probably (most likely) neither for the same “long” periods nor reasons as everyone else. I have written several articles suggesting that investors ought to distinguish between the company and the stock. While I am able to highlight the many positive things that are going on in the company, I remain skeptical at some of the fundamental challenges as well. In Rocco’s article, he wanted me to believe that those things don’t matter and instead I need to appreciate “the story” of Sirius since that is the prominent driver of the stock price.

Sirius XM has debt. When it doesn't break even, it basically ekes out a profit. It sports a P/E ratio of more than 201. Even at $2.00 a share, it's horrifically "overvalued." While I initially acknowledge them, I effectively ignore and leave these "financial metrics" up to the frustrated MBAs of the world.

From a "story" standpoint, Sirius XM runs in a pretty competitive space up against terrestrial radio, Internet radio such as Pandora (P) and other audio entertainment players such as Apple (AAPL). I think it beats or holds its own with the competition for several reasons which I outline in my body of work on the company. These reasons center around my confidence in Sirius XM CEO Mel Karmazin.

It seems Rocco has forgotten the reasons why companies report financials each quarter and puts on a “dog and pony” show for analysts. These are neither “storytelling periods” nor events. They wish to tell investors how they are performing on the metrics that these very same companies have set to imply their own perceived "value". So why should investors now ignore these very same metrics and consider them “noise?”

Assessing “value” on an investment typically depends on the investor and more often than not falls into two main categories; “absolute” and “relative”. I often try to find what is known as the “intrinsic value” of my stocks, which can only be accurately assessed by scrutinizing the fundamentals of the company. Things such as debt, cash flow, P/E ratios, P/S ratio, dividends or more specifically a “conversion rate” cannot be simply discounted as “noise”. Saying this presents me with the image of a someone covering both ears as something is being told to them that they do not wish to hear or a truth that they can’t handle.

Summary

If Rocco applied fundamental metrics to his model he would see how Sirius, while it remains a “good story”, may be considered overvalued by most economists, whereas, Apple, by these same economists’ standards, would be considered “undervalued”. “The story”, while it sounds good, will never be a valuation method to which I subscribe nor would I ever recommend with a straight face.

“Cognitive dissonance” is but another theory amongst many to identity how reality or “the truth” is often difficult to bear. When we start changing evaluation metrics in favor of “stories” to help us deal with the fact that our company may have too much debt or is not selling enough hamburgers, I would recommend another famous quote that sometimes reminds us, “the truth shall set you free”, or in investment terms, avoid a loss.

Disclosure: I am long AAPL, SIRI.

Source: Sirius and Apple, Fundamental Metrics Always Matter