One Way to Play Sirius/XM’s Recent Dip – Seeking Alpha
Shares of Sirius XM (SIRI) have dipped over the last several weeks. Even in my recent bullishness, the stock’s current levels surprise me little. Here’s what I wrote back on May 18:
SIRI closed at $2.14 on Tuesday. It would not surprise me to see the stock range in the $2-teens over the near-term before running a bit ahead of its Q2 2011 earnings report where CEO Mel Karmazin should tell us quite a bit more about SatRad 2.0 and expansion plans to serve the Latino market. We already know that Sirius XM will not raise its subscription rates until the new year. It’s obvious even to the most casual observer that the settlement will likely result in a net gain subscriber- and revenue-wise, quite possibly a considerable one.
According to Yahoo Finance, Sirius will report Q2-2011 earnings on August 1. I expect Mel Karmazin to turn in another incredible peformance on that conference call. A great chance also exists that the company will issue positive guidance ahead of the earnings report. Seeking Alpha contributor Spencer Osborne concurs with the sentiment I expressed in the above-referenced article, noting that Karmazin played everybody like a drum on the Q1 2011 call:
(Click to enlarge)
Osborne hits the mark calling Karmazin’s outlook “a win/win scenario.” Not only will Karmazin deliver beyond his Apple (AAPL)-like conservative guidance for the reasons Osborne outlines, but he will provide color on three key points he hit during the Q1 call:
SatRad 2.0. August marks the eve of the holiday shopping season. It comes earlier and earlier each year these days its seems. It’s the ideal time for Sirius to unveil firm details and concrete plans for the distribution of the next evolution in satellite radio.
The Latino Market. Karmazin essentially teased big news regarding Sirius’s plans to hook chunks of the booming Latino domestic population on satellite radio. It follows logically that he’ll announce something official in August to get those plans off of the ground.
Rate Increase. On the May call, Karmazin had to know the Blessing lawsuit settlement was coming. He clearly just could not talk about it. Expect Karmazin to spin the outcome positive, discussing the upside impact the settlement should have on subscriber numbers.
Like any upper-echelon CEO, Karmazin writes a novel for investors and analysts. He purposely holds things back, leaves out details, and paints a murky picture in spots. He only dazzles to the point he feels he needs to in the moment. And it works. With Karmazin in charge, there’s no reason not to believe that guidance, whenever we get it, will be good; Sirius will beat its own estimates; and we’ll like what we hear on the aforementioned three points. Simply put, Karmazin has a handle on his business. Therefore, very little, if any, disconnect tends to exist between reality and internal and external expectations.
Here’s how SIRI closed on Monday:
(Chart courtesy of FreeStockCharts.com)
(Click to enlarge)
There’s something for everybody to love on that chart. If you’re inclined to trade, you could have masterfully played the bearish trend from SIRI’s recent double-top. But now, let the bullishness begin. Forming a double bottom, SIRI appears ready to bounce off of its 50-day moving average and head higher.
History shows that between now and earnings, SIRI should head higher. The stock ran up ahead of Q1 earnings, following through with force after Karmazin spoke. Typical of so many stocks, we now see the post-earnings pullback. And don’t forget, size traders likely flocked to SIRI after Citigroup (C) split. This, undoubtedly, changed SIRI’s day-to-day trading landscape, but does little, if anything, to disrupt the big picture.
Here’s how I am playing SIRI’s likely upward trend towards guidance and/or earnings as well as the post-earnings pop the August 1 call should give it. First, I am dollar-cost averaging into the stock on a weekly basis. Second, I am employing options to play what I think should be a move towards $3.00 between now and early- to mid-August. I am long the SIRI September $2.50 calls.
I got into them a tad too early at $0.22 last week. I added more at $0.15 on Monday. I intend to continue picking up these calls over the next several weeks. If somehow SIRI forms strong support above $2.50, I might exercise a few of them at expiration but, more than likely, I intend to close the position under the assumption that the premiums end up turning a profit. Willing to take my chances — and possibly close the positon for a loss — I am not hedging this position.
Disclosure: I am long SIRI via positions in the common stock and Sept. $2.50 calls. I may initiate a position in AAPL, long or short, at any time.