Sirius' 10% Capitulation May Be A Smart-Money Play

| About: Sirius XM (SIRI)

I saw that Sirius Satellite Radio (NASDAQ:SIRI) dropped nearly 10% today. I am long the stock, with positions still well in the money, but I believe that this company will see $2.00 again before the year is over, and higher over the next several years. The drop from its $2.44 highs, in all truth, were a bit of a surprise -- but today's drop was not, and it might be a good thing for the longs.

With my bias out of the way, there are essentially three times when company share prices drop precipitously:

  1. The firm announces (or someone announces for them) something really bad that affects their business and their prospects going forward
  2. Someone knows something about #1 that hasn't hit the wires yet; or
  3. An investor with deep pockets, who wants to be long, sells so that the price will drop so he can pick up more shares at a discount.

Selling so you can buy more? Here's how it works. Say you are hoping to acquire a large number of shares in a company. You can buy it in the open market, and the price will rise, and it'll cost an increasing amount of money for each share you buy due to decreasing supply. Or you can, over the course of weeks, do the following: First buy some shares to see how the market prices rise, and then sell to get a feel for how fast prices decline. If you buy a large quantity and the price doesn't rise higher, then there are adequate sellers at the price. Same as if you sell and the price holds steady -- plenty of buyers for the supply.

But now let's say you increase the amount you sell and suddenly people start to get worried and they start selling their shares in panic. More and more people sell until there are no more sellers. All that is left are those willing to hold their shares knowing that there will be bumps, and if they hold on the price will begin to rise and rise fast. In the meantime, the investor who wanted to buy more has picked up lots of shares at a cheaper price. If it takes 10 million shares to force the price down and you can pick up 100 million at a lower price, you've done really well.

I don't have anywhere near the resources to do this, but I learned this strategy in the book "Reminiscences of a Stock Operator" by Edwin Lefevre. It was a strategy that worked in the early part of the 20th century, and it is just as true today for those with the resources.

And who has that level of resources? Just look at all the names bandied about on the blogs: John Malone (Liberty), Charlie Ergen (Echostar/DISH, who could buy and swap assets with Malone when the time is right), Apple (NASDAQ:AAPL)/Amazon (NASDAQ:AMZN) (could Sirius 2.0 or 3.0 have a button that says "Buy this song now"?). That's not to mention the private equity guys who see a billion-dollar annual FCF in a few years. Could be someone making a play, or it could just be just the natural gyrations of the market. I have no idea, but I'm hanging on and hoping for the best.

Disclosure: I am long SIRI.

Additional disclosure: This is a commentary on an investment in my personal portfolio. I manage the SPADE Defense Index, the underlying index for the Powershares Aerospace & Defense ETF PPA. Sirius is not a constituent of the index nor of the ETF.