Sirius XM: A Tale of Two Stocks

TheStreet.com

NEW YORK (TheStreet) -- When I was asked to contribute a story that is fitting of Charles Dickens' masterpiece "A Tale of Two Cities," the first name that I thought of was Sirius XM .

After Sirius rose to prominence by signing exclusive deals with high-profile talents including Howard Stern and securing rights to the National Football League and Major League Baseball, the financial crisis brought the company to its knees. With no one buying cars -- which Sirius needed to increase its satellite radio subscriptions -- bankruptcy seemed the last resort.

Essentially, while most companies can proclaim "the best is yet to come," very few, unlike Sirius, are able to truly appreciate "the worst of times" without detailing a near-death experience.

From an investor's/trader's perspective, however, the "best and worst" have different meanings. For me, my best and worst as a trader came when mistiming the movement of Sirius' stock.

The Best of Times: 84% Gains

A company recovering from or teetering on the brink of bankruptcy means a lot of things to different people. For some, it's a sign of poor fundamentals and an absolute sign to stay away from the stock. For others who have a higher risk threshold, bankruptcy is a "haystack" and there's a needle to find in there somewhere. I was in the latter category.

I figured that with a bit of luck I'd find three needles and possibly 10,000 more. My goal was not to get rich. I never believed it was possible playing a penny stock. I wanted to beat Wall Street. But having sat at many poker tables in Las Vegas, I also understood the odds.

Many Sirius XM geniuses still proclaim they timed the bottom perfectly and bought in at 5 cents per share in February 2009. I was not that smart. In fact, I still argue today that this was a dumb move that turned out to be smart -- even if the potential loss was (relatively) minimal. What's the difference between 5 cents and 20 cents? Or even 30 cents?

Poker players know that to make money, one has to be willing to leave money on the table. This means that you can't get too greedy. It pays to be patient and watch to ensure that you have a winning hand. Accordingly, my first trade in Sirius occurred one month later -- on March 17 2009. I bought a little over 15 thousand shares at 32 cents.

I understood that it was the first time the stock had broken the 30-cent level since November of the previous year. Many didn't know what I already knew -- the worst was over. The stock reached a high on that day at 38 cents per share and closed at 33 cents. But it was just the beginning.

Sirius' execution during the entire 2009 was "mixed," to put it mildly. A stock does not flirt with death because expectations are high. What sort of realistic demands can there be during a recovery? The economy had not yet seen the worst and auto sales were plummeting fast. Sirius was hemorrhaging subscribers each quarter and its CEO, Mel Karmazin, couldn't stop the bleeding.

Then something changed. After having lost 590,000 subscribers in the first half of 2009, Sirius was able to recover 60% of those subscribers in the second half of the year. With the investors having taken this as a sign that the "worst is over," Sirius ended the year trading at 59 cents per share. In nine months my $5,000 investment had made 84% and I entered 2010 playing with house money. Vegas, er, the Street, didn't know what hit them.

The Worst of Times: Missed a 2-Bagger

A little more than a year ago, I outsmarted myself. In May 2012, I announced here that shares of Sirius XM would not go higher than $2. My premise was simple: The stock was expensive. Given its price-to-earnings ratio, which was in the mid-30s at the time, there was little value to be had.

Complicating matters, the company's CEO, along with several other insiders were dumping the stock at rapid rates, under $2 per share. Plus, Karmazin still had millions more worth of options to exercise under his pre-planned sales.

In the midst of all of this, there was the ongoing drama of Liberty Media and its fight to gain control of Sirius.

Given how much Wall Street hates uncertainty, I felt these events had relegated Sirius to one of the best short plays on the market. I felt the stock was going to $1.65 (at least). But as the stock fell to $1.80 (twice) I still didn't pull the trigger to buy. But Sirius would never fell below $1.80.

After a stunning second-quarter report, during which management raised guidance, $2 per share was never seen or heard from again. Sirius had bigger fish to fry. Investors still remind me of my $1.65 prediction, even though I was off by only 8%. But my biggest gaffe was missing the ride up to $3 and to the $3.60 level. Essentially, since reaching $1.80, the stock has more than doubled.

What can I say? I blew it.

Great Expectations?

Today, Sirius exemplifies a tale of two companies. Karmazin, who was credited with merging two satellite companies and almost killing them both, is no longer running the ship. Liberty is now in full control of the company. Sirius is no longer bleeding subscribers and is now posting record numbers for revenue, cash flow growth. And, as expected, management has said "the best is yet to come."

Even so, I don't expect that I will ever re-establish a position in this stock, whether long or short. There are still too many unknowns.

Apple has entered Sirius' domain on the dashboard. I expect that at some point both Microsoft and Google will follow suit.

It will be challenging for Sirius to compete. But I wouldn't bet against Sirius' ability to survive. It's been through much worse.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

View Comments (7)