Warren Buffett once said, “The smarter the journalists are, the better off society is. For to a degree, people read the press to inform themselves, and the better the teacher, the better the student body.”
This is not deja vu if you feel you have read this quote from a previous article of mine, it’s because you have. But honestly, I just could not (for the life of me) come up with a better introduction to this article than with the quote above. Because the truth is I feel I have underestimated Seeking Alpha readers. I’m realizing more how I have not given proper credit to those who take the time to read my articles.
I mentioned previously that it was Mr. Buffett’s quote above that inspired me to start writing here on Seeking Alpha and I described what my objectives were for doing so in this manner: Among to inform and (at times) to entertain, there is also the will to educate; which sits at the top of my list of objectives when I write. But remarkably, I realized yesterday that I left out one additional important component, and that is for me to learn. Each day, from reading your comments, I realize that I’m learning something.
Sirius XM (SIRI) has many passionate investors and several of which were gracious enough to send me some thoughts to consider about my future articles. These came from both bears and bulls. I received a half of dozen notes from some bears who were seemingly offended by my article suggesting that they are running for cover, or however you wish to term it. They cited the chart below and were happy to tell me that they are still short.
Click to enlarge
But the most compelling email came from a reader, who upon reading my recent article, the one containing the chart above, seemed a bit perplexed. In the subject line he simply had the words “I Don’t Get It." He cited the article and quoted certain sections where I said:
- The market has a funny way of telling us what it’s about to do or (at the very least) what the “potential outcomes” are going to be. Sometimes we ignore the signs and other times we are too stubborn to believe what they are indicating. But whatever camp you happen to fall in, there are ways of making some clear observations work in your favor. In this case, after a 15% reduction in Sirius’ short interest, the market is indicating that the stock is heading up, and by a significant percentage.
- There are many who want to continue to believe that the majority of the Sirius short interest is being held by retail investors. Frankly, I find that very hard to believe. This is one of the reasons I follow the number so closely. I'm of the belief that a great percentage of the number is being held by people much smarter than I am and with large sums of capital. In some circles they are known as “smart money.” So when these market participants are deciding to close out their shorts, I tend not to ignore the implications and neither should you.
- If you recall, when Sirius’ short interest reached 317 million the stock plummeted to $1.86. The number has since dropped to 271 million. Do you remember what happened the last time short interest was at this level? It was two days before Q1 earnings and the stock skyrocketed from $1.92 to $2.44. What this tells us is that there are many who know what is coming ahead and they clearly want to be on the right side of the trade.
He didn’t disagree with my quotes above, but (among other things) he asked me a very compelling question, and it’s one that many of you missed yesterday and didn’t challenge me on it in the comments section of the article. (I’m disappointed in you guys for this.) He asked poignantly:
- “If the stock traded at $1.98 and you issued a 37% increase to $2.75 upon realizing that short interest had dropped two weeks ago to by almost 7.74%, and why when the combined monthly SI drop totaled 14% did you not adjust your price target?"
This was a very astute observation and frankly one that I did not consider. Before I replied, I immediately started doing some more research. I pulled out the calculator to conduct some additional analysis. Among some of my extra due diligence, I stumbled upon Spencer Osborne’s article where he made an excellent case for why Sirius will likely raise both subscriber and EBITDA guidance. In Spencer’s article, I was drawn to two particular key areas. He said:
- With Q2 subscriber numbers at 463,000 and Q1 at 375,000, we are at 838,000. Current guidance is at 1.4 million. This would mean that the second half of the year would only need to deliver 562,000 subscribers. Essentially the company is in a position where it now has to raise the subscriber guidance. Look for that number to be shifted up to 1.7 million, or "approaching" 1.75 million.
- What I anticipate is that if guidance will be raised prior to the conference call it may happen in conjunction with the announcement about the call date. If it does not happen July 22, 2011, then wait for it to happen with the call. Either way, hop on now because there is going to be a nice ride coming.
I have always thought Sirius would raise guidance, but I would be equally surprised if it were raised to the degree highlighted above. Even more startling would be that it pre-announced before the conference call.
Now back to the commenter's email, in fairness, I need to point out that he did not only criticize me for not raising my price target, he also offered some congratulatory remarks as well. But because of his inquiry, I was able to learn some pretty important lessons not only about research but also about accountability. In light of his challenge above and other discoveries related to Sirius’ projections as well as some “unknown surprises” ahead, I have no choice but to raise my target from $2.75 to $2.90. For this, Sirius investors should say thank you to the commenter.
Disclosure: I am long SIRI.