Sirius XM: Smart Money Not So Smart

| About: Sirius XM (SIRI)

People get bored when it seems there isn't a constant stream of news on their investments. However, depending on the company, this can sometimes be a good or a bad thing. While it's true that stocks can enter a "lull" in the absence of news, it's nonetheless remarkable that some people in this business take it upon themselves to make news of their own. This seems to be the case with Sirius XM (NASDAQ:SIRI).

Let's not get carried away

I read an article recently, which suggests that the so-called "smart money" is exiting the stock in droves. The article, which was written by Eric Schaal of Wall Street Cheat Sheet, cited a story on Insider Monkey, which suggests that hedge funds are "dumping" the stock given that (at last count) Sirius was in 36 "big money" portfolios at the end of December, as opposed to being in 46 portfolios in the preceding three months.

On a percentage basis, that may seem like a large number at a 21% decline. However, though, this does not explain the whole story. Nor does it suggest that these hedge fund managers considered Sirius less investment-worthy with their reshuffling. Lest we forget, there was this "fiscal cliff" overhang at the end of last year that prompted many funds to react to mitigate tax implications.

Unfortunately, these points weren't raised in either article. Disappointedly, Schaal, instead went the usual route by suggesting that once "hedge funds go, so does the shareholders," which is sometimes true. After all, we've seen it in shares of Apple (NASDAQ:AAPL). Then again, this doesn't explain how shares of Sirius went in the opposite direction from the $2.89 close on December 31 to reaching as high as $3.25 last month. It would suggest that the retail investors didn't care.

Fellow Seeking Alpha contributor, Stephen Faulkner said it best recently: "I wonder if such concerns don't focus on things that, at the moment, don't matter too much." Stephen's right. I get it - investors are frustrated. Admittedly, I've had my own frustrations with Sirius XM. So my issue with Schaal's article is not a "pot calling the kettle black" situation. However, though, this is not the same company that was run into the ground by Mel Karmazin, either.

Where's this company going?

There was a point when Sirius was (at best) moving laterally under his watch. Investors considered this a win. While it often seemed appropriate to rejoice the stock's recovery, Sirius was still being led by the same management team and ideals that sent it to the brink of bankruptcy. It was hard (at least for me) to applaud performances that wouldn't have been required had better decisions been made.

Nevertheless, today, Sirius is a completely different story. As such, it requires more than a cursory view of what the so-called "smart money" is doing. If anything, a case can be made that these hedge funds sold (at least) below potential 12% gains. And if recent earnings were any indication, Sirius XM will continue to reward investors in the coming quarters.

Here's some balance to consider

I'm not by any means suggesting that Sirius has suddenly turned into a flawless company. To that end, there were several things that stood out in the recent quarter - both good and bad. For instance, despite what was considered a difficult fiscal environment given concerns surrounding the fiscal cliff, that self-pay subs grew 36% to roughly 1.7 million demonstrates how much customers still love the service.

What's more, as far as business models are concerned, I don't think there can be any more bear arguments suggesting that it hasn't been working. I do wonder, though, if current management will consider tweaking the model to make it more efficient. I noticed despite the strong growth in auto sales, which climbed to roughly 15 million units, Sirius actually posted 1.5% less subscribers than in it did in Q4 2011.

In other words, growth slowed despite better than expected auto numbers. That's not how it's supposed to work. This brings up the question, should auto sales continue to serve as a predictor of Sirius' growth. It's no longer accurate and hasn't been in a while. In the meantime though, the disconnect would support why I've felt (for a while) why Sirius needs another revenue stream beyond autos.

Here's making sense

Today, with auto sales, which remains stable at a 2% churn rate for Sirius, is doing fine. But tomorrow, this may prove more challenging, especially once Apple enters the mix as is widely expected. I will agree that Apple can't compete with Sirius on content. But ultimately, it will be consumers that decide how popular Apple becomes in the dashboard. Besides, another "Siri" is already there and gaining traction.

Do you remember all those rumors we've heard years ago about how Apple was going to buy Sirius? Well, you haven't heard the last of them. I've got one cued up now - stay tuned. In the meantime, I wouldn't focus so much on hedge-fund activity. Last I checked, plenty of them are still holding Apple. Unfortunately, that hasn't worked out very well, either.

Disclosure: I am long AAPL. 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.

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