When we talk about selling someone short, we are issuing a warning about underestimating a potential adversary. The idea is that there is some undisclosed asset, talent or ability that is not readily apparent. Or, the individual has some powerful or influential friends or relatives. When I use the phrase, "Don't sell SiriusXM (SIRI) short" it has multiple meanings.
First, as a long term investor with a position in this stock, I believe in the longer term prospects of the company and expect the company to benefit from numerous recent actions. These include a price increase, used car initiatives and debt reductions. As these initiatives take hold there will be gradually increasing benefits to the Sirius bottom line.
The full impact of the price increase will take more than 18 months to be realized as annual renewals occur throughout 2012 and multi-year plans stretch into 2013. The used car program that offers a three month free trial on any used car with an OEM installed satellite radio sold by participating dealers is still ramping up. Last week, Penske Automotive Group became the latest company to announce its participation in the program. As more dealers sign up to participate and more used cars come equipped with Sirius or XM radios, the number of new subscribers from this source will continue to increase.
On the previous quarterly conference call, CFO David Frear said:
Through today, we have repurchased $130 million face amount of our 9.75% and 13% notes. The 9.75% notes are callable in September, and the 13% notes are due in the middle of next summer, that's 2013. We'll continue to look for opportunities to either repurchase or refinance debt unfavorable terms.
The $130 million debt reduction that has already taken place will result in annual savings of more than $10 million per year and if both these issues are retired by the "middle of next summer" the savings will grow to more than $100 million per year. Those savings will generate increasing free cash flow that can be used to further reduce debt or return capital to shareholders.
Don't Sell SiriusXM Short
The other meaning of the phrase don't sell SiriusXM short refers to selling shares of the stock short. Some investors view short sellers as evil. After all, it almost seems un-American to bet on the failure of a company or to make money on a falling stock price as others see the value of their holdings decline. Others have the opinion that short-sellers add liquidity to the market, or that it makes no financial sense to only bet on a one way move in the price of a stock.
Although short-term traders can make money by going long or short as the price of the shares fluctuate, if one believes in the longer term prospects of the company, shorting the shares can be harmful to one's portfolio. And, there has been a significant number of SiriusXM shares sold short for quite some time. For the past year, short interest has ranged from 252-308 million shares, with the number of days to cover ranging from 2 to 12 days.
In order for shares to be shorted, shares are borrowed from someone with a long position willing to lend the shares. With more than 3.8 billion common shares outstanding, it is probably fairly easy to find someone willing to lend the shares. Should an investor be concerned about short sellers and try to make it more difficult? Some Seeking Alpha members seem to think so. On a recent article, Seeking Alpha member micpickle wrote:
I am long and strong and locked in to sell at $5.00 above Market price.
There is the belief that having a conditional sale against a position prevents the shares from being borrowed. This is certainly true for some accounts, especially IRAs, but probably is totally unnecessary. I can't state with any certainty how all brokers behave, but Schwab requires owners of a stock to execute a lending agreement before their shares are loaned to those looking to open a short position. And, the lender receives interest on the borrowed shares.
I had been contacted by Schwab at one point about my willingness to lend a portion of my SiriusXM shares. I was even sent a multi-page loan agreement to execute before the shares could be loaned. However, the shares were sitting in an IRA with a covered call written against them, and because the loan would have created a naked short on the call, I wasn't eligible to participate.
Two points to this anecdote. First, the shares could not be loaned without the owner's permission, so the conditional sale probably does not accomplish anything. Second, I was willing to lend the shares. Why? Because as a long term bull, I believe that the fundamentals of the company will ultimately drive the share price higher. And if anyone is willing to pay me interest on my position while I wait for the share price to rise, I'll be happy to take it.
Summary
Investors with a long term perspective should be rewarded with increased earnings per share as SiriusXM reaps the benefits of its price increase, used car program and debt reduction. These earnings will eventually drive the share price higher, regardless of whether or not traders try to make money on the long or short side of a transaction.
And I will be happy to lend my shares to those evil shorts as long as they are willing to pay me interest.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time. I have no positions, or any plans to open positions in the next 72 hours, in Schwab.
