I have always said that if you are not in a state of perpetual worry in today's stock market then you're probably not paying attention. One stock that has always created much stir, acquired considerable amounts of attention and of course produces more than its share of worry is satellite radio giant Sirius XM (SIRI). The company is now less than two weeks away from reporting its highly anticipated Q1 earnings results - an event that many investors are hoping brings much vindication for what has been a considerable amount of anxiety over the past three months. Investors will be looking for evidence that not only were they right about the disappointing guidance released in Q4, but that the company will have its best year in 2012. So the question is, why has the CEO started selling his 60 million shares if the numbers are going to be so good?
It has always been hard for me as an investor to take a position in a stock that has gone out of its way to seize the persona of the "little engine that could," but it is even harder for me to consider buying a stock that the insiders have been selling to the extent that Sirius insiders have over the past couple of months. In a move that has been highly anticipated, the company's CEO, Mel Karmazin just sold over 11 million shares on the open market on Monday and Tuesday of this week at an average price of $2.20 for proceeds totaling over $25 million.
In an article on March 19, I discussed this exact scenario and offered these potential transactions as justification to short the stock to under $2.20. On Monday, upon Mel's first initial sale the stock sank to $2.15. In the article I explained the following:
- Here's what investors know as fact (at the very least): his selling of the stock is on the horizon - at least 60 million worth of shares starting this month. But investors are unable to guarantee where the buys are going to come from and (if any) to what degree? 60 million shares sold from the CEO on a stock whose daily volume is only 50 million - I have to say that is pretty significant. We also pointed out that as Mel's transactions start he will first exercise 60 million options which he will then sell to cover the price options themselves. And at that point he will sell the remaining shares at market prices for profit. Now I don't imagine (one iota) that these transactions will occur all at one time, but we know it is coming.
- In fact, where I once said I will cover my short below $2.20 I am now inclined to revise that target lower and to cover below $2.10. So do you suppose the rest of the market is also ignoring this bit of information? The fact of the matter is, no stock is immune from a normal correction, much less one where the CEO has announced plans to sell. So even from a technical standpoint, with the stock now trading at $2.26 from last Friday's close, this represents a minor correction of only 4%. I expect further downward pressure toward $2.10 to not only complete the standard 10% correction, but bring the stock back to its fair market value and in its 50-day average range.
Now that the selling has started, the question is when will it end? What will be the next sale catalyst? Will Mel wait until the price gets above $2.30 or $2.40? Will it ever get to those levels again? Will he sell again this week, next week or will he wait until after earnings? These are all important questions investors should be asking themselves at the moment. I've read many scenarios and several articles where bulls try to convince themselves that he did not have to sell just because he made an announcement. I can't begin to describe how absurd that logic was. It appears that many continue to ignore the fact that company executives do not go out of their way to scare investors without absolutely meaning what they say.
Based on these recent transactions, Mel has 49 million shares of options remaining to exercise and then sell. It would not surprise me the least bit to see another 10 million shares sold as soon as the stock peaks above $2.30 and I will imagine he has every incentive to sell ahead of the earnings report as Sirius has a history of selling on the news. If his transactions are any indication of what to expect during the earnings call on May 1 then investors should be concerned and it is likely that the word "modest" as referred to an increase in churn and/or subscriber declines will soon arrive at its true definition.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.