Sirius XM Radio: Buy, Sell or Hold?

by: Satwaves

By Brandon Matthews

I have often reminded my readers of the importance of being able to look ahead at the markets at what’s to come, rather than focus on the near term. I am also aware that, no matter what I say, there will always be a certain element which feels that my affiliation with Satwaves makes any recommendations on my part biased in a positive way. It cannot be argued that I have been bullish on Sirius XM Radio (NASDAQ:SIRI) for some time, but it can also not be argued that I have been correct in that position.

Normally, my primary focus is on the technical aspects of trading. Over the past several years, I have incorporated fundamental analysis into my research and reporting. Today, I am basing my strong buy recommendation on neither. Everyone studies Sirius XM charts and the uptrend that Sirius XM currently enjoys is clear. Everyone also studies Sirius XM’s fundamentals. Sirius XM CEO Mel Karmazin has a history of growing EBITDA at 20%. The company has guided at 20% EBITDA growth. Yet nearly every analyst model is based on only a 12% growth rate. Technically and fundamentally speaking, the positive ratings and earnings targets of current analysts that follow Sirius XM are justified.

There are also two key events that will take place in 2010, that will give added strength to this already bullish scenario. The first will come on the last trading day of May when the preliminary steps are taken to rebalance the Russell indexes. As long as Sirius XM Radio shares are trading above one dollar as they currently are, Sirius XM will be added to the index on the last trading day of June. The Russell Re-balancing will cause added demand for Sirius XM shares not only on the final day of June, but leading up to that day as traders buy in advance of the forced institutional buy-ins that will occur.

A second key event will occur in December, when the NASDAQ 100 (QQQQ) is rebalanced. If the re-balance were to occur today, Sirius XM would be added to the quad Q’s based on its current market cap. Currently, there are six companies listed on the NASDAQ 100 with lower market caps than Sirius XM Radio. There are still others with market caps just above Sirius XM’s current market cap of $4.583 billion (based on 1.18 share price).

Symbol/ Market Cap (billions)

With year end targets ranging from $1.25 -$1.50, Sirius XM is a shoo-in for this year's NASDAQ 100 re-balance. Again, traders will spawn demand well ahead of the rebalancing itself. These two events will increase demand for SIRI shares. The basic laws of supply and demand suggest that Sirius XM shares will increase significantly as the year progresses. It is for these reasons, that I maintain my bullish position on the equity.

Disclosure: Author long SIRI