supermanI was asked today my opinion on a certain nameless penny stock. As soon as I pulled it up on a chart, my immediate reply was that "I would not touch it with YOUR money!" I recounted a certain experience I had as a broker-in-training many years ago, which I would now like to share with you, the reader.

The broker I worked under had a certain client who we will call Dr. Economics. This particular client had a net worth of many millions of dollars and held some very high quality investments in his portfolio. There was one exception however, Dr. Economics liked to play with a certain penny stock called Panther Mountain Water Park which was worthless. That did not stop Dr. Economics from amassing a small fortune in the equity at the expense of the less educated investor, also known as suckers.

Dr. Economics would suddenly begin buying PMWP at under a nickel a share and would do this using various size blocks. Some small, some large.  He would accumulate over the course of a few days of buying, millions of shares at an average cost of less than .25. People who had no idea that only one person was buying the stock, would begin to notice that the volume and price had suddenly began to move up sharply. Uneducated investors would automatically assume that some major news catalyst was on the horizon, as the press began to pick up on the increased activity. A buying frenzy ensued on the still worthless equity which Dr. Economics was now all too willing to sell for .90 - 1.00 a share! This is why no one should ever invest in a penny stock.

It was then pointed out to me that Sirius XM is a penny stock. To a certain extent that is true, if you look at the stock price only. There is a huge difference in SIRI in that there is a very active market for the stock. Penny stocks have very little volume to speak of, which makes them prime candidates for manipulation. Technically, the market cap of SIRI alone disqualifies it from penny stock status.

Unfortunately, neither volume nor market cap disqualifies SIRI from the same sort of manipulation that occurred with PMWP. Every day there are thousands of 100 share trades executed which all have a purpose; to keep the stock price of SIRI artificially deflated. The question that needs to be asked is, why? The recent short covering in my opinion reveals the answer. Short sellers needed to cover and these 100 share transactions kept the stock price low enough for short sellers to cover their positions and lock in a tidy profit for themselves at the retail investors expense.

I believe that even more short covering is occurring now that the threat of bankruptcy has been removed. Short sellers have made a fortune on the stock and with the downside risk/reward being so low at this time, continuing to hold the stock short will only result in profits being eaten away. Already SIRI shares have climbed over 300% from their lows. Until all short sellers have covered, I expect more of this type of manipulation to occur.

I never received as much hate mail as I did when I suggested that a reverse split would be the best thing for Sirius common stock, but recent events have only reinforced my position that the stock has too many shares outstanding at too low a price. In my opinion, the only way for the company to avoid this sort of manipulation in the future, is to go ahead and execute the already approved reverse split. There are times when reverse splits are a good thing and for Sirius XM shareholders, this is one of them.

Position: Long Sirius XM