Keep Emotion Out of Trading

 |  Includes: SIRI
by: Robert Weinstein

About two weeks ago, I wrote an article that detailed my thoughts on the then upcoming earnings release of Sirius XM Radio Inc. (SIRI). Based on the numbers I examined, Sirius was massively overvalued. I expressed in greater detail why I believed the upside was limited in several other articles.

In each case, the comments filled up with personal attacks, as if I had kicked someone's dog. It was clear that many investors became more than a little emotionally committed to their investments. This made me wonder how someone who became "married" to a stock would know (or more importantly, act) when it was time to sell. After reading many of these comments, I thought that even if he or she is correct and the stock does go higher, he or she is still going to lose money because he or she is emotionally committed to the stock. I know of no other method of separating investors from their money faster than allowing emotion to play a role.

Regardless of what the price of a stock does, investors must have a written plan of when it is time to exit. This should include a plan for both protection of profit and a stop loss, in case it doesn't work out as expected. If you don't have a plan written down on paper, or worse yet, you believe your plan can't be written down, then you don't have a rational, logical plan, and you are doomed to using emotion as the deciding factor. More often than not, you will end up making the wrong choice at the worst possible time. To add insult to injury, once you are out of the investment, the correct action will become crystal clear and you will wonder why you didn't do the correct choice.

Sirius had some very good news recently. The company was added as a component to Nasdaq indices. Having your stock added to one of the majors such as the Nasdaq 100 will often send it much higher as funds of money managers join in to add it to their portfolio. In the case of SIRI, there was very little lift.

A little more than a week ago came the earnings report. Based on the conference call transcripts, Sirius XM believes it will add over 1.5 million subscribers this year (to add to its current record number of paying subscribers), free cash flow is expected to rise, the FCC will no longer control the content pricing, and all is well with Sirius. The question that needs to be asked is, "Why did the stock trade at the highest price of the day at the opening, continue to trade lower through the day, and has not seen the highs since?” Part of the fall could be a result of the overall market dropping, but that would not change the fact the stock is still trading lower. The real reason for this is that the results were fully priced in. With the non-stop selling of the stock right after the earnings report, it could be said that the results had been more than fully priced in, and the market expected more. The real lesson is to recognize that when a company is providing good news and the stock is not moving higher, it's all been priced in, and the only buyers are the ones late to the party.

With the very high Beta that Sirius has, if the market catches a bid, the stock may once again, in a short amount of time, see north of $2.00 a share. At the same time, with the very high forward PE, SiriusXM needs to keep doing better or it will be sold off like SodaStream (SODA) was. Many of the comments my articles have received in the past have been from self-described long term holders. While I don't make up my mind in advance how long I will hold a stock (I let the price and market conditions dictate that based on preset rules), I can see by looking at the monthly chart that the next area of support is around $1.00 per share. No one knows if it will go to $1.00 or go to $3.00 for sure, but the chart suggests moving, and staying much over $2.00 is unlikely. I continue to believe that price rallies should be met with selling back a month out of the money call options, as it appears the time decay will happen faster than price appreciation of Sirius.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SODA over the next 72 hours.