Bull/Bear Report—Sirius Satellite Radio

I had a feeling I touched a nerve with the selection of Sirius Satellite Radio (SIRI). As a long time follower of this lightning rod of a stock, I suspected that there would be plenty of opinions on where this stock was heading.

I was right. We had some fantastic posts on SIRI and I want to thank all of those who contributed.

What I did not expect was that all of the opinions that I received would be decidedly bearish or neutral. I did not see one really good argument for owning this stock.

Could that be a sign that my own bullish opinion on the stock is in jeopardy. Maybe, but that's ok.

Selecting stocks involves speculation and from time to time even the best (and yes I would put myself in that category) of us get it wrong.

I kind of liken it to baseball where the elite fail 70% of the time.

Get the case for and against SIRI in Bull/Bear Report—Sirius Satellite Radio

What I do know is that patience is a huge part of investing. If you are going to speculate do so over time. One just never knows what will transpire over the long term.

That is why private equity funds have been so active. They wait for pessimism to reach a peak and then they swoop in and buy. Once private, a business no longer needs to worry about the quarter to quarter non-sense that permeates the public markets.

Ultimately the private buyer is rewarded for its patience as businesses reach their estimated potential.

I think SIRI is an excellent example of why investors need to ignore the short term. Let's wait and see what happens as this company continues to grow its business model.

We are in the midst of a horrible economic operating environment and SIRI's product is a convenience not a need. In this environment it should be no surprise then that sales growth slowed in 2007.

While everyone else is worried about a merger, I'm keeping my eye on the prize: further penetration into a very large market.

Yes, I understand there is competition and risk of technological obsolescence, but the potential reward is worth taking the risk in my opinion.

Anyway, I'm getting long winded here. You can read more of my bullish opinion below, but first let's look at the bear case:

The Bear Case - Robert Castiglione

A lot of great ideas have come down the pike attached to great expectations and mass appeal but it appears that satellite radio isn't one of them just yet. As an amateur technical analyst, I try to screen out as much "noise" as possible and just let the charts and indicators tell me the story. To answer Uncle John (thank you for the kind words), the charts don't reflect so much what people think but what they do--where they put their cold, hard cash. Unless we're insiders, we really have no idea what is going on inside a company. Look at how many CEOs (Company Employees--Overpaid) that were much heralded a couple of years ago that are now "spending more time with their families."

Let's look at Sirius seriously from some technical perspectives: 1-year trend, DOWN, 5-year trend, SLIGHTLY UP to FLAT, Total History from January 2000, DOWN, after hitting an all-time high 69.43 in March, 2000. In a downtrending stock, the MACD and stochastics are not very good indicators, so we'll leave them alone for now. Let's look at the Bollinger Bands, PSAR, and DMI over three time spans. The italics are quotes from Stephen B. Achelis book, Technical Analysis From A to Z.

Bollinger Bands: Developed by ex-CNBC analyst John Bollinger based on a standard deviation above and below a moving average, they can tell quite a story.

1. Sharp price changes tend to occur after the bands tighten, as volatility lessens.
2. When prices move outside the bands, a continuation of the current trend is implied.
3. Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend.
4. A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.

Here are the numbers for SIRI as of today:

Monthly high and low, 4.83-2.55; Weekly, 3.79-2.64; Daily, 3.30-2.71.

As I write this, SIRI is trading at 2.82, closer to its BB bottom than top, and unless it bottoms below 2.71 and then makes a bottom inside the band (whereever that'll be on that date) it is likely to stay in a declining trading range.

Next we'll look at the PSARs (Parabolic Stop and Reverse) or as I like to call them, the "dots." Developed by J. Welles Wilder, you should be long when the dots are below the price and short when the dots are above the price. Beautiful simplicity!

Now for SIRI's PSARs:
Monthly: 3.91, Weekly, 3.29, Daily, 2.96.

All the dots are above the current price indicating you should be short on all three time frames.
Another indicator developed by Mr. Wilder is the Directional Movement Index or DMI. It is one of the best indicators to determine a trend and its strength.

I'll quote Mr. Achelis:

The Directional Movement system is composed of 5 different indicators:
1. Plus Directional Indicator (+DI).
2. Minus Directional Indicator (-DI).
3. Directional Movement Index (DX).
4. Average Directional Movement Index (ADX).
5. Average Directional Movement Index Rating (ADXR).

Bear with me. It really is quite simple. On the color-coded DMI chart, only the +DI (green line), -DI (red line), and ADX (black line) are used.

Wilder has what he calls the "extreme point rule," designed to prevent whipsaws and the number of trades. Briefly, when the green line crosses above the red line, note the high price for the day. It is not considered a true "buy" signal until the price rises above the high (extreme point) the day the lines crossed on a following day. If the opposite happens, the green line falls below the red line, the extreme point is the low for the day and a true "sell" signal isn't generated until a lower price on a subsequent day occurs. If this doesn't happen, ignore the signal.

This is my own take on this terrific indicator: Consider the green line strength and the red line weakness. When the green line is above the red line, you probably want to be long, when it's below, you probably want to be short. I've noticed that when the green line gets above 40 and the red line below 10 at the same time, look carefully at the black (ADX) line as it is signifying the strength of the move. Quite often the green line will start to decline but the black line will continue to rise. I'd stay long but make my exit stops tighter. When the black line starts to decline, it often happens in nosebleed parabolic territory and a sharp decline can occur.
Just reverse everything for short positions. A word of caution: Always use more than one indicator for your entry positions but the PSAR can be used by itself for exiting.

So how does SIRI fare here? The following is ADX, +D, -DI or simply Black Line (strength), Green Line (bullish), Red Line (bearish):

Monthly, 11-17-22, Weekly, 25-12-23; Daily, 14-17-26.

Pretty pathetic, I'd say. All three time frames show the red line above the green line and the strength as weak. On a strong move the ADX can get above 50.

You could probably trade it between 2.75 and 3.10 but there are better trades out there.
When you find these and other indicators all giving the same signal, you have a very profitable opportunity.

Happy trading!

The Bull Case - Jamie Dlugosch

Sirius Satellite Radio (SIRI) a $20 stock?

Surely I must be crazy to think such thoughts but am I really nuts? No, I'm quite sane really and with a fairly simple road map I'll show you why I think SIRI is a bargain that over time will mature to be a very fine wine.

For those that have followed my work over the last five years, you know the basics. SIRI dominates the industry with a lock on premium content that it can sell to a very, very large audience without worrying about competition due to barriers to entry.

That last statement on barriers to entry by the way is the reason the proposed merger with XM Satellite Radio (XMSR) is taking so long for approval, but I digress.

With more than 8 million subscribers SIRI is barely tapping into a market that I estimate will reach in excess of 50 million. How do I get that number?

Very easily if you consider the number of vehicles in this country and the fact the majority of those have a radio inside. My research suggests a number that totals at least 250 million with approximately 16 million vehicles new sales added each year.

Given that pay radio's product is far superior to free radio, I am quite certain that over time the industry will meet and exceed my expectations for growth. The only real question is when?
Let's take SIRI independent of any merger. At 8 million subs, I assume growth slows to about 30% this year due to absolutely horrendous economic conditions. From there on I assume growth rebounds to 50%.

That means SIRI alone will reach 52 million subs by the end of 2012. Take those numbers assume a $12 sub rate, 20% profit margin, some sponsorship type ad revenues, and a price/earnings multiple of 15 and I get a valuation of $20 per share in 2012 (based on current number of shares outstanding).

I know that many believe that consumers won't pay for something they already get for free, but please are we not beyond that argument already? For crying out loud, SIRI alone is at 8 million subscribers and they were growing in excess of 100% before last year when growth slowed to 70%.
What about the absurd losses and the fact that SIRI has never made a dime? All true. The losses are absurd, but not for an emerging growth company with a market potential this large.
According to management SIRI has the capital to absorb continued losses until they reach profitability. Yes, it is taking a bit longer than expected, but the potential reward should take the sting off the wait.

I can appreciate the concerns over valuation and capitalization. What I don't accept is the premise that SIRI has a failed business model. It does not.

The problems facing the company today have much to do with the economy and the weakness thereof. Honestly if there was even an ounce of stability, SIRI would be doing much better from a growth perspective.

And it needs that growth to reach profitability. When it gets there, the market will eventually catch on.

The point I am trying to make is that there is more than enough evidence to convince me of the potential reward that taking the risk at these levels, valuation levels not price levels, makes Rational sense.

Now let's factor in the merger with XMSR. Do you have any idea how huge this will be for the company if approved?

Let's imagine for a bit what that world would be like. No more competition for talent and no more competition for subscribers. SIRI would be free to do what it does essentially unencumbered.
That fact alone is why the deal is taking so long to be approved. The beauty is that SIRI does have plenty of other competition to justify Justice eventually approving the deal. There is free radio for one and then other devices like I-pods that make this so.

Even if SIRI needs to further concede on some pricing issues, they should do whatever is necessary in order to gain approval. Once they have it, costs will drop significantly making it more likely that the combined entity will indeed reach profitability without further capital needs.
At the end of the day, I am still extremely bullish on SIRI. The fact that I have such a contrarian view of the story provides much comfort. $20 may take patience and time, but investors should be willing to wait.

Heck, if I am wrong and SIRI only hits $10, investors will still have a triple from these levels.

Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs.com

For additional posts on SIRI, check out what these bloggers had to say:
Tom A's Stock Picks: Avoid Sirius Radio
Maybe a Pine Tree: SIRIously Losing My Patience
Don Barrett: You can't be Sirius!
Uncle John's Cabin: Get Sirius, Dude
Responses to the Question of the Week

by Mark Anderson |  03/24/08  |  Stocks: SIRI,