Cult Stocks: Analyzing Sirius

This post appeared earlier Thursday on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.

If you are a Sirius XM Radio (SIRI) bull, just skip a few paragraphs and start reading. You may not like the beginning of this piece -- in fact, you may even quit reading. But having only half the story is a dangerous thing.

Negatives

SIRI is cheap, but in nominal value. A stock trading around a dollar doesn't necessarily make it cheap, merely easy to own without spending a lot of cash. Still, many investors took positions in SIRI with a bullish thesis in mind -- something about the fundamentals or growth prospects that appealed to them, maybe. But many of those investors now find themselves trapped in a story they may not fully understand; they are bullish merely because they own the shares. This situation can lead to a confirmation bias and selection bias of information -- bulls only see the pieces that support their story, and they attach more importance to those stories than they may deserve.

I read a piece last night about Goldman Sachs (GS) owning about 1.5 million shares of SIRI and some $10 million in convertible bonds paying a 3.25% interest rate. SIRI bulls immediately took the story as a bullish sign -- after all, you never bet against Goldman, right? But this investment is equivalent to a millionaire paying a quarter for a glass of lemonade and assuming he's heavily bullish on the sweet summer drink. This level of investment is not significant for Goldman, nor is it a remotely significant portion of outstanding shares in SIRI stock. Bulls who charged after reading this piece just wanted to find justification for their existing position.

In fact, SIRI has below-average institutional ownership and virtually no insiders are long the stock. It is difficult for institutions to take sizeable positions when shares are trading at a buck -- the stock is in a serious need of a reverse split. It currently has more shares outstanding than Wal-Mart (WMT). If Liberty Media (LINTA) converts its preferred shares to common stock, SIRI will have 6.5 billion shares outstanding. Such an event would be an equity dilution of 40%. Tack this on top of the $3 billion in debt, and investors are giving this company almost a $9 billion market cap. Even if we back out the $8 billion in net operating losses that could save the company $2.8 billion, this is still a $6.2 billion market cap equivalent -- about 66% higher than the listed market cap.