Well, the SiriusXM (NASDAQ:SIRI) Q2 earnings are in and the news was good across the board. In fact, you have to go back quite some time to find a quarter where SiriusXM has been able to meet or beat the street on all levels. It is always a great thing to see company fundamentals align with the technicals, and that is exactly what we have happening.
Before diving headlong into the technical side of the equation, there is some speculation that has to be discussed. SiriusXM has now recognized the Net Operating Losses NOL’s within its reporting. This dynamic has caused a shift in the EPS to a very substantial $0.48 per share instead of the anticipated $0.02 per share. Investors who read about equities need to bear in mind that you are a substantial minority. Many folks simply hear something, react, and throw money at it in hopes of realizing a gain.
It is my opinion that the nice ride we are seeing today has happened in part because people do not fully realize the true meaning behind the NOL’s. Don’t get me wrong. The numbers were good. It is just that many of the headlines out there are indicating something that would equate to amazing when in fact, the company met or slightly beat the street in general terms.
Secondly, I am getting a smattering of emails about a short squeeze. While there would certainly be some short covering, the dynamics of a true squeeze simply do not really exist with this equity. Yes, the short count appears to be high, but there is a natural and quite substantial short position that ties to SiriusXM because of the convertible debt. In simple terms, a holder of convertible debt will short the equity as soon as they obtain the debt. This insulates them from the price movement of the stock.
Essentially the holder of this debt is insulated from a squeeze because every $1,000 in principle translates into 533.33 shares This very substantial natural short position needs to be considered and dilutes the impact of a short squeeze immensely. Another consideration is that SiriusXM is getting to be higher on the valuation multiple scale. This could trigger a new round of short sellers that capitalize on an emotional run in the stock. I am not trying to rain on any parades here, but there is a distinct tendency for irrational exuberance to happen with SiriusXM investors. If a short squeeze was in play, the run would continue unabated for a length of time. Don’t get fooled into the short squeeze mentality with this equity.
Now to the technicals. I am adding a new piece of data to the mix today based on the news surrounding the recognition of the NOL’s. It is simply a snapshot of the EV/EBITDA multiple based on the inclusion or exclusion of the NOL’s. EV stands for Enterprise Value and is calculated by taking the market cap, adding debt, and subtracting cash and cash equivalents. There may be some investors that want to treat the NOL’s like cash. This may or may not be prudent depending on your philosophy and strategy. Sirius XM has enjoyed a high EV/EBITDA multiple for quite some time. I will go into more detail on this below on why you need to understand this.
Wow! Volume was massive today with approaching 200 million shares changing hands. That is nearly4 times the average volume! There will be many saying that it is shorts running for cover, and while that is somewhat true, it does not explain the amount of volume that transpired today. The volume today is better explained by those sitting on the sidelines deciding to get in after seeing the good results released by the company as well as a positive outlook. Note that volume leading into the call was anemic. There is a trading strategy by many that simply has them not holding through earnings. This has these traders on the sidelines awaiting confirmation of a good or bad quarter. At that point they make their play.
The best news today surrounding volume is that it essentially cements some of the moves this equity has made over the past couple of weeks. Support is strong and moving upward. This is a good dynamic. What we want to watch for now is the volume to close out the week. It will be a key element in establishing the strength of the consolidation point I feel is at $2.26.
Support & Resistance
Okay, this is going to take some time. I originally wrote that my target for August 10th was $2.35. I subsequently adjusted that down to what I called a consolidation point at $2.26 with a possible spike above $2.30 that would be brief in nature. For the most part I was pretty well accurate on that assessment. The trick now is digesting all of the action today. In my opinion the spike we saw today was more a function of uniformed people thinking SiriusXM had an amazing jump from a couple of cents per share in earnings to a whopping 48 cents. Had this not transpired, I think the cap of the day would have been $2.30. One wonderful thing about technicals is that they take in and absorb the irrationality good with the irrationally bad.
Clearly the support and resistance chart is looking very green today. Way back in the rear view mirror we have that strong support at $2.11. It is tempting to forget about that level and keep eyes forward, but $2.11 is a key area that we will want to keep in sight. On a double breakdown, as remote as it may seem, this is the key support level.
With today’s action we have some more pertinent support levels to discuss, and perhaps the early stages of a new trading range developing. $2.21 and $2.26 are good support levels. With the equity sitting right at the $2.26 level it will be yet another day before we can begin to cast the current range in stone. For the moment it would appear that a possible wide trading range has opened up between $2.20 and $2.35 with a narrower one between $2.20 and $2.30. If SiriusXM can close twice above $2.26 on decent volume we can move the low end of the range upward and adjust that level as support.
With all of that being said, there is a danger zone at play here. SiriusXM is testing newer waters that are at the high end of the 52 week range. Anytime this happens selling becomes tempting for longs as well as those looking to initiate a short position. This makes upward moves more of a challenge. With the great news of the call digested, what fundamental news can become a catalyst to move into new territory with authority? Perhaps resolution on the Liberty Media situation is the answer. Only time will tell, but stay tuned for regular updates.
Exponential Moving Averages (EMA’s)
The EMA’s look very bullish now. That is easy to say when they were already bullish. The biggest development is that there is a lot more wiggle room between each moving average now. This is important because it allows the technicals to absorb an anomaly of a big move one way or the other on a news item. As you can see, the difference between the closing price and the 5 day average is 9 cents! This can actually allow for a couple of down days from these recent highs while still maintaining a bullish stance.
With so much room in between each successive average, there is no real worry about the bullish stance right now. While closing green is always nice, it is not imperative that this happen. For the moment the support and resistance are the key technicals to absorb. Of special note is the support at $2.21 coinciding with the 5 day average. We definitely want to see the stock price remain above this level.
EV/EBITDA Multiple Analysis
Okay, this will take some explaining, and I have a distinct feeling I will have to explain this again and again as time passes. The first thing investors need to understand is that SiriusXM trades at a premium relative to other media companies. This is perhaps the biggest stumbling block I see with SiriusXM longs time and time again. They wonder why the equity does not move the way they think it should. The answer is that SiriusXM is trading at a premium.
While overly simplistic, the best way to illustrate this is to imagine a pole vault competition between three men named Sirius, Disney, and Cumulus. Imagine that the average height for pole vaulting is 10 feet. Sirius, Disney, and Cumulus have all accomplished a height of 10 feet or better numerous times and it is well established that they can continue to vault at this height. Recently Disney has been vaulting at 12 feet with some regularity. Because of this Disney is now expected to be able to vault at 12 feet for the foreseeable future. Based on that Las Vegas has established that odds are quite good that Disney can vault 12 feet in the next competition. Sirius on the other hand has been vaulting at an incredible 17 feet with some regularity, and rumor has it that at an unofficial practice Sirius actually vaulted an even more incredible 20 feet. This feat was witnessed by a few, and done in the thin air of Denver, but there is no evidence that Sirius can repeat this feat at the next competition in New York. Las Vegas has high odds on Sirius vaulting at 17 feet, and progressively lower odds for 18, 19, and 20 feet. As you can see, Cumulus, Disney, and Sirius all are well deserving of a bet at 10 feet. Only Disney and Sirius deserve you to wager on them at 12 feet. Only Sirius deserves your bet at 17 feet. Betting on Sirius at 18, and 19 feet could be a decent play. Betting on Sirius at 20 feet carries an unknown and a much more substantial risk. Betting on Sirius at 21 feet is uncharted and the odds of Sirius accomplishing it diminish quickly.
Using the pole vault example you can see that Sirius is already at a premium in comparison to the competition. Adding even more premium on top of that may not be justified and carries added risk. Now taking the pole vault example a step further we can look at the NOL’s and how they factor in. Essentially the NOL’s are like giving SiriusXM a pole that is a few feet longer than standard for a few track meets. With a longer pole Sirius can easily accomplish impressive jumps. However, the pole can only be used a few times and after that Sirius must revert to a standard length pole. Essentially the pole gives SiriusXM a great temporary advantage for a finite amount of time. If you want to compare Sirius to Disney and Cumulus you need to take away the longer pole.
The key here thing for investors to understand is that SiriusXM sits higher up of the proverbial premium mountain. Anything above its current location has not yet been climbed and could deliver added risk. What needs to be considered from here into the foreseeable future is that SiriusXM analysts and writers could be speaking of either the company with the NOL’s factored in, or without. At current prices the premium is 18 to 19 when you exclude the NOL’s and 15 to 16 when you include them. If you do not understand whether or not the analyst or author is applying the NOL’s or not, you could be making a huge error in your assessment of what they have to say.
I discuss this very subject more in an article titled Applying A Valuation Multiple To SiriusXM. Essentially this will be a new period of the market digesting the news surrounding the NOL’s. My intention is to include the chart above into my updates so that readers can understand both sides of the equation. Remember, there is no right or wrong way to account for this, but it is worth noting that SiriusXM backs out the NOL’s as will most analysts. When I discuss multiples I will be clear on whether or not the NOL’s are included. It is my hope that readers find this beneficial.