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  • Relmor Demetrius: Why Are Shares of Sirius XM Radio Up in 2010? 0 comments
    Feb 27, 2010 10:02 PM | about stocks: SIRI, LMCA

    By Relmor Demitrius -

    www.kingofalltrades.com/2010/02/24/1691.html#more-691

    Sirius XM Radio’s (NASDAQ:SIRI) stock price has been on a positive uptrend as of late.  Since January the stock has increased from 60 cents a share to $1.18 earlier last week, which is almost a double.  It closed Wednesday near its 52 week high, on high volume.  In fact, volume has increased since the new year began.  Volume picked up even more in late January when Sirius XM released a press release giving a few details to their upcoming Q4 report, which will be held before the market opens, on February 25, this Thursday.  A lot of journalists and analysts have given their opinions as to why the run has occurred.  Speculation is running high right now regarding this equity before its conference call, which incidentally will be on the same day Liberty Media is having their conference call as well.  Since Liberty Media purchased 40% of the company through Liberty Capital (Nasdaq:LCAPA) in February of 2009, Liberty and Sirius XM have had different conference call dates.  Combining the conference call dates has only seemed to add to this speculation.  As usual when speculation is running high, one should try to break down things to their most basic levels, and just try to look at facts, or at least angles that can be supported by facts.  Lets do that now and see if we can’t get a handle on this price jump.

    Why has Sirius gone up so much in 2010?

    Well, I don’t think there is an easy answer, as some writers are offering.  I think it is a combination of a few fact based occurrences, wrapped into the complexity of market psychology.  Interpreting these facts can lead to a logical conclusion of this recent price action.  In this interpretation I will go forward with one assumption.  That Sirius XM shares are in demand by institutional investors.  Although it is a strong assumption also supported with facts, it is still an assumption never the less at this time.  To buy any stock however, once should assume this to be true, first and foremost.

    After Sirius XM released their Q2 results, the stock had traded in a downtrend.  Despite improving cash flow, cutting costs, and refinancing debt (including removing the Liberty loan of 15% entirely) the stock still could not gain new highs.  Volume began dropping, as the same price range was offered repeatedly throughout September through the month of December.  There was no real news during this period to drive the stock price.  Only doubt and fear seemed to linger.  As the date to trade over $1 approached, Sirius XM needs to trade over $1 for 10 straight trading days before March 15th to avoid being delisted by Nasdaq, of which they now have logged 5 straight days, and the stock seemed stuck in the 50 and 60 cent range, buyers seemed intent to wait it out, to see if the reverse split/bid price rule requirement situation resolved.  I ascertain the thinking here is that if the stock was going to reverse split, big money might as well wait till retailers sold on that news, than drive up the price for no reason.  If shares would come available, they might as well become available well under $1.  So regardless if the company reverse split or not, institutions would bag great market cap long term buys, regardless of price.  Even in a medium or a long term situation, as institutions are usually holding for the investment, not the trade, a buy at 50 cents based on market cap was a steal if this company could ever book a profit to their common shares.  So this type of thinking lead to low prices being offered, and a waiting game of chicken with retailers.  It was apparent that all retail buyers who where buying had already bought, based on current news, and all the retailers selling that were selling in that range had already sold.  If the price dropped, the volume dropped, which is a technical indicator that a price pop on an over sold condition would occur at any time.  As November moved into December, retail selling due to tax reasons were possible, so there was no reason to move the price up to get shares.  Shares were being offered, and big money waited.  Things changed the first day in January.

    No longer could institutions expect shares to drop in their laps.  Insider bonus shares on sale every 2 weeks most of 2009 were gone.  The Russell share dumps in June were well absorbed by now.  Retailers and institutions selling for tax purposes in November and December were sold out.  With the 30 day rule in effect for all these sellers, (to book gains on a tax loss, you must wait 30 days to rebuy the same equity), the market makers had their chance.  Move the stock up a bit now, while no new planned sales were expected, and before tax loss sellers were able to repurchase.

    So what happens on January 4th, 2010?  After closing the year at 60 cents on a late day surge, the next first trading day into the new year, the stock gaps up one cent to open at .61, runs to .66, and closes at .64, right at the support/resistance line.  The move had begun.  Still not a huge jump, these prices had been offered before, but the stock responded that day with 40 million in volume, a 21 million share jump from the last day in December.  Off no news.  There was no explanation for the volume jump.  The next day the volume jumps again to 53 million shares, December was seeing around a 20 million a day volume average, and the stock moves to .69 cents.  It then trades sideways for a number of day, volume drops again, and the market makers decide their next move.  Retailers begin unloading shares on any up move, as they are becoming more fearful that any gains are better than nothing, and there is no guarantee a reverse split will be avoided, which could mean an excellent chance to re buy lower might be coming.  Also, why be in shares while waiting, when there is so much doubt in the equity.  Then Mel plays his first card.  If Mel Karmazin is too be believed that the company did not want a reverse split, and would prefer the equity trade over $1 on its own, a little help from Sirius XM might be in order.

    On January 19th, Mel Karmazin, CEO of Sirius XM Radio, released a press release detailing some facts about the upcoming conference call for Q4 that will occur in February.  It states that they gained 257,000 new subscribers, (which beat all street estimates on the metric), improved the retention of the product (take rate), and less people cancelled (churn rate) than the previous quarter.  They also released that free cash flow goals of 2009, stated in late 2008, had been achieved.  Mel had promised positive total for the year free cash flow, and guaranteed in the press release at least 65 million of it.  This means that regardless of earnings, which is the next step to an improving balance sheet, the company was now generating more cash than was going out.  In the worst economic environment of our lives as well.  A clearer picture was becoming possible, and smart accumulators were in a bind now.  They knew this would entice buying, so they had to move the stock again.  As long as the reverse split fear was still heavy in the air, and journalists were still printing negative press about the company, up movement would be advantageous in this environment, as it would entice even more selling, as the price moved up.  Retailers would book huge percentage gains in this rise to $1, as they felt it was still a risky hold, and that any gains were better than nothing.  And keep in mind, this stock had been teaching investors and traders all of 2009, that retraces are the norm.  They can be expected almost like clockwork.  Since there was fear in the air, and gains on the table, the effect was obvious.  Huge retail control is being transferred to smart money, big investors, and institutional control.  As the stock is so low and a global move possibly coming with Liberty Media in a joint venture to put satellite radio in Europe and beyond, maybe this wasn’t such a terrible business model after all, and maybe now is the perfect time to buy.  If retailers caught on to this now, the selling would turn into buying, sells would be pulled, and smart money accumulators would have to pay even more for their shares.  If news was coming on this stock that was a game changer, they had to move it high enough to get the most sellers out.  Dropping it down now was just no longer possible.  Stubborn holders may not sell, and time was running out.  If institutional demand got restless, too many chances to get retailers out would pass, and that opportunity would be lost.  This would cause institutions to have to pay more for the shares they want.

    So on January 21st the stock gapped up again, and closed at .74 cents.  The stock gapped up when S&P gave Sirius XM a corporate credit upgrade from B- to B, and kept their outlook at positive.  This means that Sirius XM could get yet another upgrade within 6 months to around 2 year time.  The stock also received a boost from a Moody’s credit upgrade as well.

    With these news events supporting the initial surge, higher prices kept becoming necessary to get to a price level that got more sellers than buyers.  The staggered good news, also the Blackberry application was released in this time frame too, kept making higher prices necessary.  The end result of all of this was a stock price trading over $1.

    Here is another timeline of events that happened parallel to the above news notes and price action.  Some of these factors may have given enough hints that game changing news might be coming soon, and time to get the retail shares at extremely low prices was limited.  Rumored reports of first ever profits, debt refinancing, global plans, credit upgrades and new deals might have jump started the buying interest way before the conference call or even before Sirius XM’s press release in late January.

    Funny thing happened on the way to a $1…..

    Here is an outline to what was going on behind the scenes, and might have had a possible effect on the timing, and what was assumed might happen in the coming months to this equity.  Changes in a companies capital structure are huge events, and anticipation of these events can cause a price to move when there seems like no news is warranting the action.

    In November of 2009, on the Q3 report it showed that Morgan Stanley returned 60 million lent shares on the 2014 convertible bonds used for hedging.  They were no longer needed.  This can lead to some factually based speculation as to why.

    In December it was reported that JP Morgan had initiated coverage on Sirius XM’s debt to overweight, which is a very bullish outlook.  Basically vindicating the business model, and gives investors the assumption that the debt is safe, and would be repaid.

    Later that month, Bank of America/Merrill Lynch initiationed coverage as well on Sirius XM’s debt, again at overweight.

    In Q4, Sirius XM restructured some of their debt to be backed by hard assets.  This gives them more flexibility on how they can handle this debt, and gives more control back to the company.

    We know that Mel Karmazin has stated that he wants to refinance more debt.

    As evident in these factual occurrences, I am speculating that there is a debt refinance announcement coming shortly.  I also expect on this yearly report that it will be reported that Liberty is buying up the 2014 conversion notes.  Sometime soon, we will get an announcement that the 2013 13% 770 million dollar merger bonds have been refinanced with a lower rate, and their due date pushed back.

    This could also mean that in the Q4 report, it will be shown that all the 200 million remaining lent shares for hedging the merger bonds have been returned and destroyed by the company.  I expect this to be the case.  This would be huge news in removing some of the conditions of the “ugly financing” needed to complete the merger in July of 2008.

    Are there other reasons possibly for the price movement?

    Other fact based speculation that institutions are respecting as possible events soon could be that a spin off of XM assets into a new global media company by Liberty, which would mean possibly that Sirius XM stockholders might get shares of a new company, a complete overhaul of XM’s debt structure, or any other not mentioned debt related changes.  These reasons are very speculative, but all possible.  I do not discredit these possibilities, but I am more focused on more plausible reasons at this time.

    Buyout rumors are causing this price jump?

    Not a chance.  No proof to support that, nor would Liberty buyout Sirius XM before their agreed upon 2 year waiting period.  It would require a stockholder approved vote, and would directly affect the tax loss (NOL) of Sirius XM.  Another change of ownership before the 3 year period is over, would result in a drop from 80% use of tax loss, to 50%.  This resets 3 years from the merger date however, back to 100%.  Also Liberty can effectively control the company without incurring all the risks.  There was a reason there wasn’t a last minute fire sale of the company to Liberty back in February, and he was only able to get 40%.  The common has value, Sirius XM will use its own NOL, as stated by Greg Maffei, CEO of Liberty Capital, and Sirius XM will be very profitable in the future, also stated by Greg Maffei.  Mel Karmazin knows the cash cow that Sirius XM can become, and their is no reason to give that away.

    Stock Is Running On Rumors Howard Stern Will Re sign.

    Not a chance.  No way the stock doubles on rumors he is re signing.  There are no details about his contract talks, what he might get paid this time, or what the conditions of the contract would be.  With his contract not expiring until the end of the year, I seriously doubt this is the reason for the price action.  Not even sure him actually re signing right now for less money would have caused a jump like this, let alone a rumor he might for an undisclosed amount we don’t even know, which no details of any sort.  So I am discrediting this as being the reason.

    So lets sum up some of the thinking that institutions and accumulators might have gone through.

    Basically if the stock looked like it might avoid a reverse split, and the company was intent on avoiding one, through aggressive public presence with strong guidance, and commanding facts, or by applying for an exception and receive one, which would only give more time for other investors to load up with cheap under $1 shares, as well as allow even more time for good news to hit the company, they might as well use the fear of a reverse split to get shares out before the certainty of the event was known.  As institutional reports from Q4 are even showing now, institutions have indeed been adding shares.  Even in the low stagnant volume months of Q4, Vanguard found a way to add 6 million shares, as well as MFC Global found a way to add 44 million shares.  Overall reporting for Q4 shows that right now, there are more institutional buyers than sellers.  I expect more Q4 reports to show this continued trend, and the proof of this analysis will come in the Q1 reports, which would show possibly 1 billion retailers took the quick gains from 50 cents to $1, and sold their shares, never being offered lower prices again.

    I think all these factors are why there is heavy buying over $1, and why the stock has stayed strong over $1 for 5 straight days now.  If they do avoid a reverse split, there can be an assumption that $1 is the new floor of this equity.  With Sirius XM Radio still trading near $1, there is no reason to wait anymore to buy.  With a new year, a new equity is born.  Gone are the penny stock days of hell.  We are back to a normal trading stock, that will begin trading on fundamentals again, rather than the whim of a computer trading program, working a group of tired retail investors just begging for a fair price.  Remove the fear, and you remove the restraint to buy.  If downside risk is minimal, 2010 could be a great year for Sirius XM.

    For more articles by Relmor Demetrius or the other writers at King of All Trades Online Financial Community - Please visit: http://www.kingofalltrades.com/


    Disclosure: Long SIRI
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