Sirius XM: Lessons Learned and Ignored

Jun.24.11 | About: Sirius XM (SIRI)

Many lessons were learned leading up to Sirius XM's (NASDAQ:SIRI) Q1 earnings report. But disappointingly, I discovered that there were many lessons that were missed or even worse, ignored by Sirius investors. The market often teaches us to "expect the unexpected." For me, this was the most obvious message last quarter and remains the premise on which I trade. But I have come to discover and remain amazed that Sirius still has more fans that it has "investors." A distinction that still appears to be a challenge for a great majority of its "investors," a term that I now realize that I use too loosely.

Many of you still wanted to imply that the market had somehow "woken up" to Sirius as it surged towards $2.44. It reminded me of a New York Jets fan who instantly claims a Super Bowl berth immediately after winning only the first game of the season. The parallel is simple: one quarter does not imply victory. In Sirius' case, there were three quarters left to play. This is what "investors" know and "fans" have yet to master. They rather be immersed in the story while ignoring the facts. Sirius mind games are nothing new. This is what the stock does and has been doing for quite some time. It has the uncanny ability to make even its staunchest critics perform complete 180s. But to be successful, you can't get too high or too low. Consistency in your views and in the metrics that matter is often the recipe for success.

Let's recap some hits and misses

Hits

Much was made about the well publicized pre-announcement trading strategy on Sirius XM. 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 and I watched pre-market activity give me the indication that maybe I was right when the stock hit $1.86. But that was the end of my excitement. I shortly realized that I sold too soon.

Misses

By 10 AM that morning, not only did the stock surge upward, but it sustained its gains throughout the day as well as the days that followed. Another egregious "miss" of mine was underestimating the impact of CitiGroup's 1-for-10 stock split. It was marked on my calendar yet I did not make the correlation with Sirius. I marked it for a reason, but I soon realized, it was for the "wrong reason."

As Sirius' stock price surged in uncontrollable fashion from a pre-earnings low of $1.91 to $2.42 in what I can only describe as a blink of an eye," the only logical thing for me to do was to short it. The volume in the stock was nothing short of remarkable as it doubled within a week's period of time. I asked if anyone noticed Citi's (NYSE:C) share volume before the split. It was over 500 million shares per day, yet on 5/10 they closed on 42 million in volume or 91% less than their average.

I am no conspiracy theorist, but it is my opinion that the volume and volatility that once was a staple on Citi's trading activity will now find a new home in Sirius XM.

Volume and volatility.PNG Click to enlarge
(Click to enlarge)

While Sirius continued to amaze investors with its performance in share price, I remained wary of what appeared as erratic behavior in both volume and volatility. In the chart above, you can clearly see where the disparity in volume started: May 2, the day before the company's Q1 report. As of close on 5/12, Sirius has posted five sessions of over 110 million shares traded, including one day of topping 243 million. Just to keep this in perspective, as of May 2, the day before the earnings report, Sirius had been averaging 55 million shares per day during the three-month reporting period, according to Yahoo Finance.

What was even more noteworthy is that in all of the trading sessions since May 2, Sirius has averaged almost 11 cents price swings per day, a truly astonishing occurrence on a stock that is trading just above $2.

Summary

These were some of the lessons investors, or those who wish the claim such a title, should have learned. The above outlined what I have been saying all along, “the stock does not trade on fundamentals" and when it does, investors will be better off for it. There were some other “hits and misses" that I could have outlined. Most recently the stock dropped below $1.90 or specifically to $1.86, something that I have proclaimed was going to happen. This was a healthy regression and a sustained period of consolidation.

Though I remain very critical of the company, particularly with its less than stellar conversion rate, uninspired marketing as well as its over-dependency on auto sales, I think the stock still has plenty of room to grow. How far it goes depends on the lessons you have learned and those you have chosen to ignore.

Disclosure: I am long SIRI.