Maybe a Pine Tree

Ahknaten - SIRI ously Losing My Patience and Other 'Hot' Stocks

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Sell SIRI. On Apr. 21st, '05, Forbes had an article called 'Wolverine Shorts', and in that article I disliked SIRI. On that day it closed at $5.14 and has since dropped -43% to $2.93. In my virtual short fund on Marketocracy, I shorted SIRI in Feb. '05 at $5.95 and then covered it on Oct. 31st '06 at $3.83. I had covered it as I had found better stocks to short, but I still dislike it today. SIRI has had 10 years without having a positive EPS and so my patience has run out. I'll break SIRI down into a few categories that I like to follow.

Value story? No.
It has a poor PE, price/book, price/cash flow. I made a valuation model of it, and even with aggressive nice estimates, I still get a target price <$0. I read somewhere that someone has maintained their target price of $20 during the past few years, and I have to ask with some polite criticism, 'are you rational'? Have you held that same price target the entire time? Do you still have that target price, or have you adjusted it with respect to current conditions? Short.

Quality story? Yes.
The company does not have high accruals. It could be a good stock for those who like low accruals. Long.

Smart money story? No.
The insiders have been selling the stock and even though it is under $5, it still has a high short interest. Short.

Momentum story? Yes.
Earnings have improved, and although they're not positive, SIRI could appeal to some momentum funds. Long.

Growth story? No. Short.
You might be surprised that I would say 'no' to a stock with high sales growth. But when you have high sales growth like this, I actually dislike it, especially if you're not making a profit. Sorry, the growth story doesn't work for me. Remember, if a stock has high sales growth, it has to slow down at some point, and when it does, it can hurt. Many analysts take the high sales growth and create forecasting models, but many also forget to lower those growth estimates as time goes on, and if growth slows down and the valuation story isn't there, then the stock has a poor value/growth story going for it. Short.

Looking at that breakdown, I get a 3 No's and 2 Yes's, and that tells me - Sell.

Would you like to be a 'hot' analyst?

Why do we keep hearing about stocks like SIRI? It's quite simple. People like to hear about companies they 'understand' and 'recognize', and they like to hear about 'hot' stocks. These are the stocks that drive blog hits and news headlines, and they're easier to promote to clients, but they're not necessarily the best stocks to buy. Think about it, if everyone is talking about it, don't you think it's too late to buy? So for fun, I made a very simple screen on Factset (awesome software) and limited it down to stocks that people 'easily understood'; in other words, I found 'discretionary', US-based stocks with a market cap over 500 million, and then sorted them by 1 year sales growth. It's an incredibly easy screen to make. Guess what stocks you get from that screen? These will be the stocks that you hear people talk about and make the news, and you'll hear funds talk about them to increase their marketing and assets under management. These are the stocks that generally have quite a lot of analysts and those analysts will compete against one another at having the highest price target. Some of those analysts take very aggressive estimates on their terminal values in their DCF models (if they even make one) and come up with silly price targets. Then, if your valuation doesn't look great, since you're required to write a report about it for press, pick a stock price that looks to be "within reason" of current high/low prices, make a story out of it, and you'll get a 'technical-not-too-academic' price between $2.50 and $4.00. This is the 'hot' stuff, and as I've said before - avoid it! Find 'boring, buy low' stocks and then 'sell high, hot' stocks. So what are the "hot" stocks on that very simple screen that I made? CROX, ICON, NTRI, SIRI, NCMI, VMED, WYNN, RHD, LULU, CKXE, GRMN, GME, TRYB, XMSR, PENN. Guess what? We've already heard three of the top 4 stocks in the blogs, and I'm quite sure we'll hear more about the others later on. You can be just like some analysts and pick one of those stocks and a high price target and blog away. You might just get noticed, and I'll be ready to write another blog like this.