Sell Sirius XM Before Earnings: Opinion

NEW YORK ( TheStreet) -- I'm not easily irritated, but nothing bugs me more than when investors put "hope" on the same level as quantitative assessments of a company, such as a cold, dissection of its income statement.

The stock market provides all sorts of hints about where it is headed, but investors often choose only those hints that point in the direction they want -- or "hope" -- the market to go.

Now I'm not going to pretend that I'm a psychologist, but as a former longtime shareholder in Sirius XM Radio ( SIRI), I think I qualify to discuss what happens when "hope" in the stock market meets chronic disappointment. After all, how how many times has the company failed to meet expectations?

The company plans to report first-quarter earnings Tuesday. Some investors are clinging to the belief that the company will not only deliver a market-beating performance but will also raise subscriber guidance to make up for what was perceived to be a low-ball projection earlier in the year.

Even if Sirius raises guidance and delivers a "good" quarter, the question is what will it mean for the stock. It will mean very little if anything at all.

$2.50 and Not a Penny More

Sirius' narrative is one that has reached urban legend status. Its tale has been told in "telephone-game" style to the extent that the story gets more and more exaggerated and distorted each time it is passed on to the next person.

People say, "Here was a 5 cent stock a couple of years ago that has now grown more than 4,400% -- you should jump in on it."

But the reality is, that fairy tale has reached an end. Disappointingly, many current investors wish to hang on to the hope that somehow another 4,400% is on the horizon, failing to realize that the stock would need to reach $100 to produce that kind of return.

If the stock rose to $10 from current levels, that would represent a gain of 344%. Hitting $5 would require a gain of 126%, and reaching the more realistic $3 would represent an increase of 35%.

So in a market where the average return per equity is less than 10%, a question arises: What is so special about Sirius XM that compels investors not only to disregard valuation metrics, but also to become heavily invested in hope?

The market has been saying for quite some time that it is willing to offer $2.50 and not a penny more. This has long been the top of the range for the stock. Each time Sirius XM has traded at more than $2.40, all those investors who bought shares the last time the stock was so high dump them, trying to break even on what has been a disappointment. This time won't be any different.

Expectations for the Quarter

During the company's fourth-quarter and full-year announcement, Sirius said it expected churn to increase slightly by 0.2%, and that there was a "modest" response from subscribers regarding its recent base-price increase.

Because of that, I am expecting subscriber numbers not to be as solid as investors are anticipating. Sirius said in February it planned to add 1.3 million subscribers in 2012, a figure widely regarded as low. I think an increase of 420,000 to 460,000 subscribers for the first quarter would represent a slight victory for the company, a number that would put it ahead of its expected full-year pace.

Bottom Line

But if the company reports such numbers, there's no justification for the stock to go higher. The fact of the matter is, Wall Street has already priced in all of this information.

After all, the stock has an enormous price-to-earnings ratio of 31. Sirius trades higher than some growth tech companies even though it is not growing as one.

For this reason, unless Sirius announces something that completely flew under the radar, I expect shares to drop on the news to less than $2.10 and possibly even further to $2.00.

Investors would be wise to sell ahead of the announcement -- as the company's CEO recently did -- to secure any profits that they've already racked up.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

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