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Is it just me or is Sirius XM (NASDAQ:SIRI) starting to give off that “warm and fuzzy” feeling that normally precedes a breakout? These “warm fuzzies” come in different shapes, sizes and colors and are often a byproduct of some type of anticipatory reaction. Last week we talked about investor psychology in a term known as “cognitive dissonance," or simply the idea that we will try to rationalize even the most aversive conditions - if we are forced to live with them.

This week, the new term is “confirmation bias." Confirmation bias is a phenomenon where decision makers have been shown to actively seek out and assign more weight to evidence that confirms their already established opinions, and ignore evidence that could show them where they might be wrong. We are all guilty of this, even me. Before you get disappointed, this is not going to be a discussion about our mental state. This is about trying to identify if we can be both truthful to ourselves while at the same time maintain a certain level of objectivity or balance in our investment decisions. I have always maintained that both terms (objectivity and balance) at times can be overrated, but for the sake of this discussion let’s say they are not.

Several weeks ago, in an article I mentioned that I thought Sirius XM stock was going to retrace below $2 with an outside chance of dropping to $1.85. I got criticized for it and was called a basher and repeatedly labeled an “instant author” by the same person who inspired me to research the psychological conditions effectively known as “cognitive dissonance." My premise for the prediction was simple and it was based on something that Warren Buffett told me, “be greedy when others are fearful, and be fearful when others are greedy." You may not have realized this, but Mr. Buffett’s theory was based on the psychology of investors; clearly he subscribed to the ideas of both “cognitive dissonance and confirmation bias”. OK, Cameron, where are you going with this? That’s a fair question. I’ve received an ample dose of criticism for having been bearish on Sirius and now that I am long, I’m receiving an equal amount of criticism for that outlook as well. It appears that my target for $2.75 is not enough to dispel neither the animosity nor the basher label that I continue to wear as the scarlet letter.

My Confirmation Biases

As much as I try to tell myself otherwise, I realize that I am not immune to this psychological condition. Since establishing my long position in the stock, I have been actively searching for clues to affirm my decision. Last week I took Janco Partners' upgrade of the stock from Accumulate to Buy with a price target of $2.50, raised from $2.15, as the first of many new signs that the stock is about to take off.

The second sign was in an article by Seeking Alpha contributor Spencer Osborne in which he offered a deeper look at Sirius’ used care deal with General Motors (NYSE:GM). Sirius announced a deal that effectively changed the whole dynamic going forward, in which offers Sirius a second chance at getting idle radios activated. The CPO deals gave consumers a three month promotional subscription. According to Spencer, the problem has been that dealerships are more worried about the sale than letting consumers know about the promotion. What transpired is that consumers were oft not even aware that their satellite radio was active.

Another bullish sign was how Sirius dropped to a recent low of $1.86 on June 13 and has since risen 13% to $2.10, which now appears to be a temporary ceiling, one that is due to fall at some point this week. But I would be remiss if I didn't highlight from a trader's perspective what I think has been a clear sign of bullishness: Short interest dropped. I can't overlook the significance of close to an 8% reduction which “confirms my bias” that the stock is all but guaranteed to reach a minimum $2.30 over the next several weeks. The other 30 cents to 45 cents is going to come from a combination of the points mentioned above as well as some of the other unknown catalyst such as information regarding satellite 2.0 as well as an increase in guidance during the upcoming conference call.

Not to be outdone, on Tuesday, Standard & Poor's increased the likelihood of an upgrade for junk-rated Sirius XM Radio Inc. because of expected benefits from improving automobile sales. In raising its outlook on Sirius to “positive from stable," S&P said the following:

“The company's revenue growth depends heavily on automobile demand, noting that the best way for Sirius to expand a top line almost entirely comprised of subscription fees is to add new subscribers. Price increases tend to exacerbate churn, making subscriber volume growth the company's key growth prospect.”

“Continued recovery in auto sales will support growth and in turn strengthen credit measures over the near to intermediate term.

Last month I indicated that I thought Sirius XM’s stock was no longer expensive. I attributed that sentiment on a credit ratings upgrade by Moody’s which also cited subscriber growth as the basis for the rating improvement. It said the ratings outlook was "stable" and raised the corporate family rating to "B2" from "B3."

Credit ratings should not go unnoticed, nor are they ignored by the astute equity markets. Although that was still several levels below investment grade, in my opinion that is a pretty important factor determining the long term viability of a stock, particularly one that is trading under $5. Events such as this does impact the company’s ability to grow; and yes, this does justify (on some level) a higher than normal P/E.

I then pointed out that the last time Sirius received a credit rating upgrade, the stock started its surge to where it sits today. Sirius’ shares traded at $1.24 on October 3 last year, when investors first learned of a credit upgrade by S&P. Another upgrade was then issued by Moody's on the 14th. By the end of December, Sirius closed at $1.63 for a 31% increase in two months.

Summary

The reason these “confirmation biases” or “warm fuzzies” of mine are being highlighted is because as “inadequate” as the term may make investors sound (myself included), it is an intricate part of the due diligence process, whether it is a byproduct of “cognitive dissonance” or not. The 31% price appreciation in two months mirrors what I currently suggest is a 37% increase to $2.75, a target that Sirius should hit in a relatively short period of time. The fact of the matter is that the stock is poised for a breakout and investors should be buying at these levels.

Disclosure: I am long SIRI.

Source: Sirius XM: My Confirmation Bias Continues to Target $2.75 Level