Liberty SiriusXM Group (NASDAQ: LSXMA) (NASDAQ: LSXMB) (NASDAQ: LSXMK) is a tracking stock that represents Liberty Media Corp-Liberty Formula One's (NASDAQ: FWONA) (NASDAQ: FWONK) ownership of SiriusXM. Liberty Media is, of course, the investment vehicle of famed media investor John Malone, who has delivered market-smashing returns throughout his career making deals in the cable industry during the 1980s and 1990s, and now through Liberty Media.
As of April 22, Liberty SiriusXM owned 68.6% of SiriusXM. The main reason to consider buying Liberty SiriusXM over investing in SiriusXM stock directly is that the market is significantly undervaluing Liberty's ownership of the satellite radio company.
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Liberty SiriusXM offers a good deal, but there are downsides
Investors who like the growth prospects of SiriusXM could indirectly buy the stock at a substantial discount by buying the tracking stock. Liberty SiriusXM's ownership of SiriusXM is worth about $18 billion, but the market value (total shares outstanding times the stock price) of Liberty's tracking stock is currently at $11.8 billion -- a 34% discount to the value of Liberty's holding in the satellite radio company.
Liberty SiriusXM is the right stock for investors who not only like SiriusXM, but also like the investment strategy of betting on the jockey (in this case, John Malone).
But there are two reasons not to buy Liberty SiriusXM. First, Liberty has no access to SiriusXM's cash. The controlling interest in the company requires Liberty to include SiriusXM's operating results in its financial reporting, but Liberty is just along for the ride as a passive investor.
Second, tracking stocks have a history of trading for discounts to the underlying stock. The discount between Liberty SiriusXM's market value and its stake in SiriusXM has been getting wider over time. It was as low as 10.6% three years ago but gradually increased to over 30% by 2018, where it still sits.
The widening discount means that the performance of the tracking stock has not kept up with the performance of the stock it's supposed to track. Over the last three years, Liberty SiriusXM has returned 23% compared to 47% for SiriusXM -- a significant underperformance. That performance gap might be enough of a reason for investors to take a pass on the tracking stock and buy shares of SiriusXM instead.
Two reasons Liberty SiriusXM might be worth it
Even with the downsides of owning a tracking stock discussed above, there are a few reasons why Liberty SiriusXM might be a buy at these levels.
The most important reason to own Liberty SiriusXM is John Malone. Since 2006, Liberty Media has acquired and spun off its various interests in media companies, including DIRECTV (now owned by AT&T) and SiriusXM. The combined compound annual return of owning Liberty Media and all of its spinoffs and tracking stocks is 24% from May 2006 through Oct. 2018. That's an incredible record compared to the 6% annual return from the S&P 500 index and speaks to the investing prowess of John Malone.
Another reason to consider buying Liberty SiriusXM is that Liberty Media sometimes uses its tracking stocks as currency to make other deals, and by owning shares of one, you can hitch your wagon to one of the best dealmakers in the business.
Also, it's important to note that Liberty Media isn't helpless if one of its tracking stocks trades at a discount to the value of its holding. Liberty Media has been actively repurchasing shares of Liberty SiriusXM to help alleviate the discount. But ultimately, it's up to investors to see the value and bid up the share price to narrow the discount, and that's not a guarantee.
Worth a look
Those are the pros and cons of buying Liberty SiriusXM. If it were trading at a smaller discount to SiriusXM, I would say forget the tracking stock and buy SiriusXM directly. But at a 34% discount, and with Liberty Media's track record of generating phenomenal returns for its shareholders, I think Liberty SiriusXM is worth considering at these levels.
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