Sirius XM: Why It Is Now A Great Short At $2.35

Mar.12.12 | About: Sirius XM (SIRI)

"It is remarkable how some authors get accused of only seeing the "bad side" of good information, yet I don't recall readers ever accusing authors of pumping the good side of bearish data. I find that interesting."

- Cameron Kaine

I read an article recently where an author was trying hard to make a case that short interest data on Sirius XM (NASDAQ:SIRI) can have a "bullish" side - I almost spilled my coffee. It was as if the article was suggesting that one should buy a stock because too many people were betting on its failure. Let's try to understand this for a second, Sirius XM recently lowered its subscriber guidance to 1.3 million from a net of 1.7 in 2011, but the bullish signal is that it has a high percentage of short interest. I'm not following the logic.

The truth about short interest

At $2.35 and trading at a P/E of 33 Sirius XM is grossly overvalued and the market understands this. The stock has nowhere to go but down from this level - whether to consolidate from the significant 30% gain that it has earned this year, or at the very least, it will correct back to its fair market value range of $2.10 to $2.20. There is absolutely no logic to why the stock is now at $2.35 and the recent increase of short interest data supports this.

Now back to the article. It was flawed for several reasons - not the least of which started with the headline itself - "bullish short interest data?" Is that not an oxymoron? The truth is, the headline told me all I needed to know about the content, which is, don't even bother. While it served to lure in unsuspecting investors about "the long term potential" of Sirius XM, short interest data is used solely by traders. While there is absolutely nothing wrong with that, readers need to realize the context of what is being sold in these articles - either you are near-sighted or far-sighted. But attempting to sell both visions at the same time shows a complete lack of respect for readers.

As you all know by now I have made it a habit of analyzing short interest information. I always check the data when I initially scan a security because it can help when analyzing the charts, or specifically quick entry and exit points. It is a trader's metric and (at best) used by investors to gauge an overall sentiment on a stock sort of like a public opinion poll or gauging a president's approval rating (if you will). The unfortunate thing for investors is that, just as in Mel's appearance on Jim Cramer last week, many of you completely missed the true meaning of what is being sold in that article.

Here's what investors need to know about traders and how short interest information is used. If I want to design an entry/exit strategy, for me it becomes very important to know the short interest ratio of that stock which is simply the percentage of outstanding shares that are currently short and is usually quoted in terms of the float, or the number of shares currently available for trading. I use it to estimate the time it will take short positions to cover their shorts based on the average trading volume which is reported in days although Nasdaq releases the report every two weeks.

My $2.35 short bet and other myths

As you can see from the graphic above, during the last reporting period, short interest on Sirius climbed almost 5 percent. A lot of that has to do with the fact that the stock as also climbed over the past several weeks to levels where many have now perceived it to be significantly overvalued by its now enormous P/E of 33. And with the stock reaching a high of $2.36 on Friday, frankly, a short at $2.35 was just too good to pass up. And I plan to hold it even if it were to climb as high as $2.50 - which had been my target all year. But my bet is that I can cover at some point in the next couple of weeks under $2.20 if not under $2.10.

I can hear all the unsophisticated longs already - "Cameron, you better cover now, this express train has left the station." Here's what you don't know, it doesn't matter what you think about Sirius XM the company or SIRI the stock. Investors take short positions for a variety of reasons. In my case, I think the stock is poised for a pullback, so while some may continue to poke fun at the fact that I sold at $2.15and "I've missed a run", I can easily make up the 20 cent difference on the way down - it makes no difference to me. So keep the comments coming.

Some investors continue to ask why the short interest in Sirius continues to rise with so many so-called "catalysts" on the company. That's a fair question because the reason is not always so clear because it will depend on the investment strategy of the funds that have taken short positions. This is another mistake that investors often make in thinking that the large short position are being held by retail investors. This is a myth. Also investors need to ask the very important question, if a company is sound, why would investors take short positions? While there are numerous reasons investors take short positions, the five most common are:

  1. The stock is overvalued
  2. To hedge other positions in the portfolio
  3. As part of a long/short strategy
  4. Betting on an earnings disappoint
  5. Betting on downward guidance or revision

When there is no obvious reason for a large short position, I have found that it is often due to extreme overvaluation or a large run up in shares such is the case for Sirius XM, which has now climbed 30% so far this year. Now this compares to the Dow, S&P500 and Nasdaq that has climbed only 5%, 9%and 14% respectively. So the clear and obvious question is, what are the odds that this trend will continue? Because the higher a stock rises, the more optimism that has been priced into the stock. And if it disappoints, shares could tumble. This is what the short data sees and what many investors don't.


Of course there are many other reasons why short interest on a company can be high. However, regardless of the situation, it is rare for the short interest to be high if the company has such excellent fundamentals and such glaring long term prospects. For me $2.35 was a short opportunity that I could not pass up. But we will have to see how this play out. My fair market or "intrinsic" value for the stock remains in the $2.10 to $2.20 range and this is the area where I will be looking to cover.

Disclosure: I am short SIRI.