Sirius: Taking My Stand As A Long

Mar.21.12 | About: Sirius XM (SIRI)

About a month ago, I wrote of a few ways that Sirius (NASDAQ:SIRI) could (finally) push past the $3 mark and beyond in the short term. Being a long, as many of you are as well, I hope this comes to fruition. It is a point we have envisioned for a long time.

I have been reading some of the comments posted in some of my recent articles, and a few have struck me as being off base. Those of you who have read my articles and seen me comment on others (even before I became a contributor) will know I have always been pro-Sirius and in fact I have never posted a negative comment about the stock on this website, nor anywhere else for that matter.

I will list some of comments I saw below, and explain how inaccurate I find them to be and also give my thoughts on why this stock is going to head upwards. I also will touch on why making money as you hold and grow your position is something you should do, especially with a stock behaving as Sirius has.

"Take a stand man and either be a believer, or diss it"

If you don't stand for something, you will fall for anything.

Ok, for the hundredth time I will. This stock has many wonderful things going for it. Whether it be the improving EBITDA, increasing subscribers, price increase, NOLs going forward, increase in cash flow, and the auto industry looking like it will exceed numbers this year.

Also, don't forget that many of the agreements with the auto industry will reset shortly which means the cost of doing business will decrease as well. There also could be a share buyback, or (less likely) a dividend paid out. These are a few of the many positive things many of you know of already.

On the negative side, I see only a few things short term that could stop the company from improving. If the competition (finally) can come up with a model to match (so far noone has - Pandora (NYSE:P) is not profitable), the auto industry regresses back to the 2008 days, or if a buyout by Liberty (NASDAQ:LMCA) occurs in which case you would be better off purchasing shares of Liberty than Sirius, even though a buyout would in the short term drive the price up.

I also am a bit worried about how the new platform Lynx is actually selling. Will it be the great new thing we all hope it will? I also have some concerns about whether or not Sirius can expand into new avenues via partnerships or find a way to penetrate other countries. If they can find a way to go international (I wrote about this and was chastised for mentioning it) that could change everything.

These are minor details in my eyes, which does not make me feel the stock cannot increase in value in both the short and long term. Although I write covered calls against part (yes, only part) of my position, I always utilize other strategies to benefit just in case it takes off (as Apple (NASDAQ:AAPL) did this month). I do this because I AM A BELIEVER IN SIRI. The covered calls are written more because the stock has not moved recently, and I see no reason why (in the short term 1-2 months) it won't jump much higher.

My thought is the shares are priced right to buy in between the $2.25 and $2.35 levels. I believe $2.50 is coming more like 2-3 months down the road (after 1st earnings) and closer to $3 by the end of the summer (after 2nd earnings). I am basing this on Mel more than likely "undercutting" the estimates (as usual for him) and expect some pleasant news come April when the QTR1 results are announced. I also hope that the used car market adds additional self-pay subs that will help the bottom line and that the churn will not be affected all that much with the price increase.

"So, do yourself a big favor, make up your mind relative to the long term potential SIRIUS represents as an "investment", and then make a trade and stop dancing around the edges for a few pennies. That's what dividend paying stocks and bonds are for. Or you can open a nice CD with your Grandma"

Ok, so what this comment tells me is that we as shareholders are not allowed to make money while owning the stock, even if we are longs, because there is not a lot of money to be made.

As I have written in many articles before, I have made a killing on writing covered calls on the shares I own, during 2 different points in time of owning the stock. And by the way, I do own shares and also Jan 2013 options as well, so I think you can say I have a financial stake in the stock.

Many of you will recall me writing a 3 part piece on options (along with Rocco who handled the 3rd part of the series) in which I described writing $1 covered calls against my position when the stock was in the .50 range. I more recently wrote about how leading up to the Liberty potential takeover how you should write covered calls against your position to profit from the "hype". If you followed my theory, you would have pocketed the premium from writing the covered calls, and still own the stock. You would have gained money by writing the calls and holding the stock, nothing more, nothing less. I also showed the below numbers showing how Sirius has acted like a yo-yo the last 8 months.

MONTH LOW HIGH MONTH CLOSE
JULY 2.11 2.33 2.11
AUGUST 1.65 2.11 1.80
SEPTEMBER 1.51 1.80 1.51
OCTOBER 1.45 1.84 1.79
NOVEMBER 1.75 1.88 1.88
DECEMBER 1.75 1.88 1.82
JANUARY (12) 1.86 2.16 2.08
FEBRUARY (12) 2.10 2.26 2.26
Click to enlarge

As you can see, there has never been a 20% increase in share price from point to point (month open to month close). It has yo-yoed up and down a few points. Even still, you can see this month it sitting at $2.26, exactly what it closed at last month. This is a perfect stock to write covered calls against. Using options will benefit you on stocks like this. I have mentioned many times before, 75% of all covered calls you write historically (when written on price targets out of the money short term) will expire worthless.

If Sirius does not want to pay a dividend, it does not mean you cannot use covered calls to make money. There is no "rule" against it, nor does it mean you aren't bullish on the stock if you do it properly. And since he wants you to believe you only "make pennies", or Grandma's CD would give you a better return, let me provide you an example from an article I wrote last month.

The example I provided in the article prior to Liberty restrictions being lifted would have netted you a 2% return (less commission so maybe more like 1.5%) over a 2 week period. If you used that strategy every month, that is a 18% ROI NET over the course of the year. How many folks out there generate 18% per year on their investments? And that is if the stock does not go up.

"Be long, and be long without conditions, or don't bother being long"

Anyone can understand that falling in love with a stock for the sake of falling in love with it can be very costly. Things change all the time, both in the marketplace and on a per stock basis. If you follow the above advice, you will find yourself in the poorhouse very quickly. There should ALWAYS be conditions on being long on any stock. You need to be able to change your thinking if need be. There also are many ways you can be long, it is not black and white but shades of grey.

Being the skilled poker player that I am, I know you must adapt frequently from hand to hand, flop to flop, even card to card. What the above advice is basically saying is that every time you get a hand you like, you are going to go all in without seeing the flop, or fold your hand and not play. Sure, sometimes you will take the pot down, but sometimes the flop will turn your great looking hand into an average one, or worse. A good poker player will adapt, and the market is very similar in that sense to a poker game.

I wrote a month or so ago that I was a 9 out of a scale of 10 in terms of being "Pro-Sirius". I recently stated that I was now more like a 7. I am still a believer in the company, although now I have a few things I have seen that make me be a little less gung-ho about it, which I mentioned above. I have adapted my stance on Sirius, but overall still like the company. It is like starting with pocket aces, then seeing 3 diamonds hit the flop. I still like my hand but have some concerns about the possible flush.

Being a smart investor means being able to change your theory on a stock based on changes in the stock fundamentals, changes in the market, the health of our country, or even on what is going on in the world. You need to adapt and change your thinking all the time.

Let me close by quoting Robert De Niro from "Heat":

Do not have any attachments (love of any stock), do not have anything in your life (portfolio) you are not willing to walk out on (sell your stake) in 30 seconds flat if you spot the heat (bad news) around the corner.

If you cannot follow this, you are probably better off at the slot machines in the casino than investing. Stay long Sirius nation, hopefully $3 is around in time for Labor Day.

Disclosure: I am long SIRI.

Additional disclosure: I currently own shares outright, with covered calls against some of them, and also own Jan 13 SIRI calls.