Sirius XM: The Difference Between Bulls And Cheerleaders

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 |  About: Sirius XM Holdings Inc. (SIRI), Includes: DMD, LMCA, NFLX, P
by: SA Editor Rocco Pendola

For a number of reasons, I love when a Seeking Alpha commenter turns author.

First and foremost, it shows the power of SA. Ultimately, "the people have the power" here. Cheesy, but true. Readers decide who they will follow and build a connection with. The SA model provides opportunity to a wide range of people who deserve to be heard. Some disappear, quickly realizing that it's not easy to write about anything, let alone stocks, but others, such as Cameron Kaine, turn into top contributors who inform, add value and entertain.

Second, the metamorphosis from commenter to author helps debunk falsehoods and conspiracy theories that peanut galleries perpetuate. For example, several Sirius XM (NASDAQ:SIRI) longs claim that Seeking Alpha systematically attempts to "keep SIRI down." I've been accused of being on the take from hedge funds. Often, in response to that inane criticism, I tell the commenter to submit an article. If it passes editorial muster, which has very little, if anything, to do with your stance as a bull or a bear, you'll probably see it on the site.

And boy, the ardent SIRI long has come through. Just take a look at the titles of some recent articles about a small slice of Middle America's favorite stock:

Howard Stern And America's Got Talent: How It Will Help Sirius XM

Sirius XM: Filtering Out The Dirty Water

What Is Happening With Sirius XM Defies Logic

And, my personal favorite:

Why Sirius Will Succeed And Pandora Won't

In that article, the author's pom-poms cheer right into a classic good-and-evil Bushian dichotomy and appear to get in the way of the facts, particularly in this paragraph:

To finalize, I believe that Sirius still is the company with the brighter future than Pandora. There are too many things that Pandora needs to overcome. They are working with an unproven model that depends on not only growing subs, but also having the advertising revenue keep pace with them. They have not turned a profit yet to date. They have one major stream of revenue (advertising), and do not "sell" a tangible product (like a radio receiver) in conjunction with their main revenue. Sirius has most of their hardware (satellites) in place already, has been improving their financial metrics, has a basic monopoly on the industry, tax write-offs and a list of other positives that go on and on.

Forget about the factual errors, including Pandora (NYSE:P) has "not turned a profit yet to date." But let us consider the crux of my presentation - unchecked emotion can cause "investors" to not only fall in love with a stock, but do everything they can to sell the stock to the masses. One of my favorite Seeking Alpha authors, Modernist, starts to get at this point in a recent article:

What is Sirius XM's real ability to make money? Cramer's discussion of this is quite limited. He discusses the opportunity of selling to new and used car buyers. But the low-end services like Pandora will be selling in the same market. Cramer says that doesn't matter because last year Sirius XM grew its sales despite such competition. So Cramer is saying, look backward when it helps our valuation, look forward when it helps our valuation, and look at free cash flow when it helps our valuation. That's a multiple-choice defense.

Sorry, Mel Karmazin was the one saying some of these things, but I found it hard to tell the difference. Cramer was busy nodding his head the whole time - like a good salesman.

And that's what happening with so many supporters of SIRI, here and elsewhere. They're salesmen and saleswomen who have one goal in mind - to defend Sirius XM and carry its torch against even the slightest detractor. If you're considering a long position in the stock, that, along with Cramer's seal of approval, ought to scare you away.

When it comes to Pandora - and don't take this the wrong way - I could not care less if you buy the stock, short it or completely ignore it. What you decide to do with P as an investment - or any other stock for that matter - makes little difference to me. In fact, I would argue that a stock like P is actually a bit too risky for most people's blood, particularly ahead of earnings. I can take this type of attitude because I am not emotionally invested in the success or failure of Pandora.

The second that I care about whether or not you buy P, I become emotionally invested. It's one thing to write about a company and its competitive position within a space. It's entirely another to borderline cheerlead for its success. Either you made a sound investment decision that will prove its worth over time or you did not. You should have no inclination to "sell it" to others unless your heart has taken control of your mind.

Cases in point. Consider this snippet from one of the above-linked articles:

According to the WSJ article Liberty wants to use the buyback to take them over 50% ... using the first model of a buyback of 450 million shares (where Liberty does not help in the buyback) would make their 2.75 billion shares worth $10 billion (at $3.63 per share) ...

This is one of the reasons why so many investors see Sirius as a deal at $2.22 and consider it undervalued. They see the future. So even though Buffett is not always right, I am going to listen to him this time, throw logic to the wind, and be patient. I might even buy more shares.

That's a classic example of a an admittedly illogical head in the stars. Compare that to more sane and logical SIRI bull-turned-author, Crunching Numbers, in What Price Should Sirius XM Shares Be?:

(Liberty (NASDAQ:LMCA) CEO Greg) Maffei, at a UBS conference, stated he thought the price of Sirius stock was high when it was trading at $1.83 on January 4th. It wouldn't seem that the current price of $2.20 is going to be attractive two months later.

Ask yourself some questions: How much - after cash return - do I want for each dollar that I invest? Then look at some projected future cash flows per share for each of the nearly 7 billion diluted shares. How much are you now willing to pay for Sirius? The answer might surprise you. (You can find some clues here). If you find out that you wouldn't pay $2.50 to $3 per share, why should Liberty? One last question: Do you think a $3 price is insane? I know I do.

That's a pretty big SIRI bull speaking there. But, it's also a rational investor who can ask himself meaningful questions. And when he asks the reader to do the same, he brings value, not a fight song, a hope and a prayer.

However structured, you need to be skeptical of share buybacks. As much I like the company and its future prospects, Demand Media (NYSE:DMD), a recent IPO, is one of the companies that hopped on the buyback bandwagon. While I do not agree with this Reuters' columnist's take on the company's long-term view, I do concur that a buyback by Demand is wholly ill-advised. It's smoke and mirrors. It's a transparent show of "strength" during a very natural period of weakness, aka growing pains.

To that end, Netflix (NASDAQ:NFLX), an apparent growth company, bought back shares throughout 2011. Simply put, buybacks - no matter who is doing it or how - can signal red flags. It's all about the situation and the point in its life cycle the company issuing them is in. I'm not sure why Netflix bought back shares. Janney Montgomery analyst Tony Wible thinks the company did for reasons that had little to do with "returning capital" to shareholders:

This dynamic reinforces our view that Netflix has been buying stock to offset the dilution from its large issuance of equity to its management team, which has aggressively sold the stock with many options priced as low as $1.50 per share.

Returning capital to shareholders. If Liberty would consider buying stock at these levels, why wouldn't you? And if Buffett is buying LMCA he must be trying to get a little SIRI. That all sounds so great. Occupy Washington Park, rent a megaphone and get the whole crowd chanting such war cries. Maybe Rage Against The Machine will show up and sing Testify?

In Sirius XM's case, what does it say, as a shareholder, if you have to anticipate yet another bailout, in the form of a buyback, to pump up your already-lofty stock price? With all of this apparent "free cash flow," shouldn't the company, in conjunction with Liberty, have some other plans? It beyond stuns me, how a company that runs in such increasingly competitive spaces - audio entertainment, new media, Internet radio - refuses to truly compete in some of those spaces and aggressively invest in them.

If you're a shareholder, set aside the emotion, the need to be proven right and your love for a product and service and "ask yourself some questions." But, maybe more importantly, look at the chart.

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We've been here before. Several times. This is not some hyper-growth story seizing massive opportunity. It's time to get your emotions in check and take some profits.

Disclosure: I am long P.

Additional disclosure: I am long NFLX June $40 put options.