Sirius XM (SIRI) investors have been on quite the roller coaster ride lately, and at 32x earnings many investors think the stock is too expensive and risky to own. In my view, however, the stock is too cheap to short, based on cash flows as well.
You see, Sirius has managed to stage an impressive come back over the past three years. Back in 2009, Sirius XM posted a $329MM loss. In 2011, the company posted an impressive $426MM profit. Clearly, this is not a utility stock and is not for the faint of heart. Sirius bears will point to the Pandora revolution, the lack of a need for the service thanks to Apple‘s I Tunes, the slowdown in subscriber growth etc, as reasons for the stock to tank, but some of these fears are already factored into the price of the stock.
What I think the bears are missing is that Sirius is still growing and the stock is arguably cheap based on enterprise value to EBITDA. Sirius has an EV/EBITDA of just 11x – which is the type of multiple given to a boring oil stock like Exxon or a staple stock like Procter & Gamble. While Sirius XM may be in trouble because of technological advances, the stock is still a growth name trading at reasonable multiples. Unless the bear case plays out perfectly, the stock could squeeze unsuspecting shorts and move substantially higher over the medium and long term even with all of the headwinds and uncertainties the company faces.
The best argument for shorting SIRI, however, is the company’s large tangible deficit and shaky balance sheet. That said, Sirius managed to pay off some $550MM of debt last year and the momentum on the bottom line is starting to tick up. With a negative tangible book value of $3.7 Billion, however, Sirius XM is a serious candidate for bankruptcy protection at some point in the future if it can’t spit out large profits and cash flows over the next few years.
Read More Here: http://seekingalpha.com/article/493911-sirius-xm-looks-tough-to-short-and-a-turnaround-is-always-possible
But stocks make lousy long term investments at current valuations and we think stocks have a lot further to fall, possibly sending the S&P 500 under $1250 or so during the summer months. We often are bullish on equities, but usually that’s because of an undervalued, underbought condition in the market. Today, stocks are trading to rich multiples of book value, sales, and earnings. Price to free cash flow multiples are quite high while profit margins are generally at mult-decade highs for most large cap stocks.
In other words, the momentum appears to be favoring the bears, but of course one should expect a sharp “snap-back” rally at any point to clear out the shorts and stick new longs in at the tops. It’s the same old “parting the sucker from his money” trick that the market has always played on investors, except that this time it really is different — buy and hold stock investing could produce negative real returns over the next year or two. Over the next decade, I expect stocks to put up 4-6% returns annually.
Just look at the news out there, GDP revised down by Goldie, ISM weak, 9% unemployment (that we know about), margin compression coming from higher oil and commodity price, bank stocks selling off like its 1932, and silver and gold still rising parabolicly…
The bear market is likely about to begin, but don’t tell that to people buying CRM, LNKD, and NFLX today! Valuations again don’t seem to matter (which usually means that a top is near) and stocks markets are all below their 50 day moving averages…
In short, I’d rather be short equities than long them although our bounce plays today worked quite well… We still have a POMO ramjob potentially coming tomorrow so make sure to not get caught too short and remember that the Stochastics have not been this oversold since the Post Fukushima melt up when stocks retraced a 10% loss with a 12% gain… It’s annoying, but it happens… In the end, a fully hedged stance longer term can easily be justified here, and even a bearish longer term stance has merit….
I am only bullish for the next minute, hour, day, whathaveyou but I’m a a raging bear in the medium and longer term. POMO may keep the party rocking for a few more days but soon enought the music will stop and everyone will be looking for a chair.
Stocks that look the weakest right now will likely look the strongest quite soon…. so bargain hunt but make sure to do so in a covered call format. QE3 is not in the cards yet, and until we get that announcement (which will send gold to $2500 and silver to $100 an ounce) make sure to play… DEFENSE!