Sirius XM Investors Could Be Disappointed

| About: Sirius XM (SIRI)
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In the short-term the market is a voting machine, in the long-term, a weighing one.

Ben Graham

Twice each month a list of NASDAQ companies with the largest short interest is published. The most recent list had Sirius XM Radio (NASDAQ:SIRI) in the number 1 slot, a somewhat dubious distinction. The company has been at or near the top of that list for quite a while.

This leadership position, rather than raising concerns, sparks articles telling investors that this is wonderful news and that an impending short squeeze will send the shares to new all time highs. Who is correct? Those un-American shorts that have the temerity to vote against Sirius XM, or authors that are looking for a large short position to fuel a rally? Perhaps both are correct, and perhaps neither. The more important issue is whether or not investors should care.

Investing or Trading

If you are a buy and hold investor in Sirius XM, have bought into the fundamentals of the company and have a multi-year time horizon, you are going to let the market act as a weighing machine. You shouldn't care too much about the size of the short position, whether it is increasing or decreasing in the number shares shorted, the percentage changes in the short position or the number of days to cover. It's just noise, and even if there is a short squeeze that drives the share prices higher, it should not represent a permanent change in the price.

The market is constantly voting on the value of a company. We do that each time we make a decision to buy or sell. Temporary disruptions caused by a quick exodus of short sellers choosing to cover are just that - temporary. The value of the company has not changed. It bears repeating - the price of the stock may have changed, but not the value of the company.

Not all investors are strictly buy and hold. They are constantly reassessing the value of the company. In the case of Sirius XM, they look not only at the metrics that the company publishes each quarter, but also the level of new vehicle sales, the macro-economic environment that can influence those vehicle sales, the competitive landscape, etc. They may choose to sell, rather than wait to find out if perceived threats become reality, or, they may choose to add if there are perceived opportunities.

If a short squeeze drives the share price above what these investors perceive as fair value, they may choose to sell, then wait on the sidelines for the price to decline to fair value or wait until the fundamentals have improved to the point where that fair value catches up to the share price. Or, they may just go off to a different investment.

Both sets of investors should consider that short sellers are looking at similar data, valuing the company and arriving at very different valuations. When there are 370,368,894 shares sold short, and that number has risen 9% in the past two weeks, and it represents more than 11% of the non-Liberty Media (LMCA) common shares of Sirius XM, it is certainly worth considering what the shorts might see that the investors who are long don't see or choose to ignore.

Traders have different objectives than longer term investors. They are looking to make money on near term movements in the share price and traders that are long have the most to gain from a rapid upward move in the share price caused by a short squeeze.

What might the shorts see?

There are a host of issues that could affect the price of Sirius XM. The company is searching for a permanent CEO, investors are waiting for 2012 subscriber results and looking for 2013 guidance. There will be the FCC decision on the Liberty application for de jure control of Sirius XM. The shorts are betting that one or more of these events will disappoint investors and drive the share price lower. Or, maybe they see the potential selling pressure from the 7% Exchangeable Notes and its potential dilution.

It has been speculated that much of the short position is part of a hedging strategy by holders of these Notes. These Notes can be converted at a premium into more than 300 million common shares of Sirius XM, and upon a change of control, many Note holders may choose to convert. If the Note holders also have a short position, the 370 million share short position could be greatly reduced, and there would be no meaningful squeeze.

Or, for those with unhedged positions, they may simply convert, and sell their shares. If that happens, the sudden selling pressure could provide an opportunity for the shorts to cover at lower prices, and again, the squeeze is averted.


The motives or time horizons of the short sellers is not at all clear, and it is not a given that a large short position will cause a short squeeze and a jump in the share price. Even if it does, there is little reason to believe that the effect will be sustained.

Traders may choose to vote against the shorts, hoping for a squeeze. Or they could choose to vote with the shorts and join them. Investors should just weigh the prospects of the company, consider their investment horizon and decide whether the share price reflects fair value of the company.

The large short position might just be background noise, and investors hoping for a sustained upward move in the price from a potential squeeze could be disappointed.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position. I also have a variety of other covered call positions. I may initiate (or close) a buy stock/sell option position in SIRI discussed in a recent article at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so.