With the news that Sirius XM (NASDAQ:SIRI) CEO Mel Karmazin has adopted a trading plan for shares of the company's stock in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934. I've begun to receive email and tweets asking the question, what does it mean? First, let's go over the rule as it is defined by the Securities and Exchange Commission.
According to investopedia, Rule 10b5-1 of the Securities and Exchange Act of 1934 is defined as follows:
- It is a rule that allows insiders of publicly traded corporations to set up a trading plan for selling stocks they own. Rule 10b5-1 allows major holders to sell a predetermined number of shares at a predetermined time. 10b5-1 plans are used by many corporate executives in an attempt to avoid accusations of insider trading.
- It is not uncommon to see a major holder sell some of his/her shares at regular intervals. For example, a director of XYZ Corporation may choose to sell 5,000 shares of stock on the second Wednesday of every month. To avoid conflict, 10b5-1 plans must be established when the individual is unaware of any material non-public information.
According to the article, Mel's pre-planned sales are part of a strategy for financial planning in connection with his philanthropic efforts. The transactions are set to start this coming April where he will first exercise 60 million options which he will then sell to cover the price to exercise the options. At which point he will sell the remaining shares at market price for profit. To be fair, Mel will still own almost 70 million shares as well as options of the company. But at the end of the day, those were his shares and his right to earn a profit.
So did the CEO
How should investors perceive this news? I think that is a pretty predictable question to answer. When it comes to Sirius, I think everyone's mind has already been made up one way or another as evident by my recent article. The more appropriate question is, through what lens are you looking? However, investors need to realize that (regardless of reason) a sale is a sale. There is no way to spin this. Granted it does not imply that there is anything wrong fundamentally with the company, but when investors and/or traders are loathed for selling their shares, it is fair to point out that "so did the CEO."
What does it mean for the company?
Now back to the original question - what does it mean for the company? Maybe it does not mean anything at all and simply implies what Mel intends to do and the direction of his focus. Many have speculated that he plans to retire at the end of the year. This news somewhat lends credence to that theory. But anytime an insider sells stock of the company on the open market, it tends to raise a red flag with astute investors - where it is typically look upon as a negative. Even to the extent where some may completely ignore certain attributes of the transaction and focus solely on the fact that it took place.
To be perfectly fair, I don't think this transaction by Mel makes Sirius more or less favorable of an investment than it was yesterday. In this case, Mel's enactment of the Rule 10b5-1 suggests that the sales will be systematically pre-arranged and continue at regular intervals where it is not perceived by investors as an underlying reason to be cautious about the stock. This news will allow investors to be aware of and understand that Mel is simply opting to either diversify or as the article notes, a part of a strategy for financial planning in connection with his philanthropic efforts. I say good for him.
However, interestingly this announcement comes on the heels of several large money managers having recently sold the stock in the fourth quarter of last year. To me Sirius continues to be its own worst enemy by how it operates. And this is yet another example - investors still have not fully digested the disappointment of its recent Q4 full year earnings announcement and now a few weeks later, we learn that the CEO plans to sell stock. The company continues to get in its own way and is unable to shed the underdog mentality.
As much as the company appears to be moving forward it continues to struggle with leaving the old "radio" technology behind. At what point will investors stop making excuses for ineptitude? Sirius has been around for over 20 years and yet it is being discussed with start-up verbiage - "it is young, give it a chance, it is too soon to expect so much," etc. etc. Investors also want to talk about its turnaround story - as great as it has been, that is now going on four years. When do we stop hanging our hat on that? Do you want to really know what a great turnaround story is - Apple (NASDAQ:AAPL) from 10 years ago. It dropped its "computer" from its name and now look at where it is?
"Radio" will be the death knell of Sirius if it does not change. I think this tight definition will hinder the tech image that it eventually might want to adopt. As I have said previously, this is the same mindset that has allowed Amazon (NASDAQ:AMZN) to now be considered a technology bellwether when it first started as a retailer - one that sold only books. Now not only is the company a formidable opponent to Apple (AAPL) by the early success of its Kindle Fire, it has also taken on Netflix (NASDAQ:NFLX) in movie streaming with its Amazon Prime service.
For Sirius to succeed, it needs to put its eye back on the ball and realize that unless it adapts, there will be no such thing as subscriber growth as it will eventually flatten and the company will assume the same fate as newspapers and magazines. As a reader recently noted, if the company believes in the product and respected consumers why have they not developed a marketing plan to address the needs of entertainment and consumers as a way to capture a broader spectrum of subscribers? Instead the company has been on a mission to cut costs on content - yet we continue to say "content is king." As I've said before, Sirius XM needs to wake up - and more importantly, so do Sirius XM investors.
Disclosure: I am long AAPL.