Sirius Satellite (SIRI)

Rumblings out of Washington and the FCC indicate that a decision on the merger is imminent. The stock was up nicely on Thursday, but more impressive was the 8% move higher during after hours trade. If approved, I expect SIRI to move higher, but I would not be surprised if the move is a dud. I'm more concerned about the long term and there I could not be happier. This is a huge deal for SIRI. No more cut-throat competition for talent, subscribers, and auto installation deals. Now if we can just get this economy on stable footing, we would be in good shape. For the long haul, SIRI combined with XM is poised for success. Enjoy the ride.

Goldman Sachs (GS)

Good timing for my stock of the week, Goldman Sachs (GS). On Friday Standard & Poor's cut the outlook for GS to negative. Citing market volatility the rating agency believes revenue and profit at the venerable investment bank could be lower than expected. The collapse of Bear Stearns, especially the rapidity thereof, has certainly spooked the market. The irony for me is that typically volatility leads to increases in trading revenues for investment banks. Obviously we are living through a very bizarre time in capital markets. I'll leave my opinion for this week's Bull/Bear article.

Microsoft (MSFT)

With the turmoil in the financial markets and a recessionary backdrop, Microsoft (MSFT) and its bid for Yahoo (YHOO) has been relegated to second fiddle status. Since YHOO rejected MSFT's $31 bid, there has been little talk about a counter offer. MSFT is taking the right approach with this deal. They have been quite patient while YHOO exhausts alternatives. In some ways it appears YHOO is wishing this deal would just go away. Keep dreaming. MSFT will ultimately prevail and the only question left is at what price. I'm pleased that MSFT hasn't been forced to raise their bid. My guess is that eventually a deal will be forged. I still think the deal gets done in the mid-$30's. The only question is when. Stay tuned.

Bear Stearns (BS)

The shock of the Bear Stearns (BS) collapse remains fresh for shareholders even though the stock managed some life late in the week. Whether or not this makes any sense is irrelevant. It appears that speculators may feel as if there is hope for a higher price. For certain, the stock, now tied to JP Morgan's (JPM) value, may explain why shares are trading well above that $2 headline. Whatever the explanation, there is no reason to stay here in my opinion. If you are long, take your medicine and move on. You may have recourse in a class action shareholder suit, but I just don't see how holding on makes any sense. Consider the extra $4 a bonus.

Notes

As a big fan of politics and history I am watching this year's presidential election with keen interest. In addition to reading as much as I can about all the candidates and issues, I particularly enjoy watching the Sunday morning political news shows.

Today on Meet the Press, I was surprised to see first segment of the show dedicated to the economy and markets. Even more strange was seeing two CNBC commentators as guests.

While I can appreciate the interest in cross promotion, the choice of these two as guests left me somewhat stunned. I mean, they are journalists and all, but we are on the cusp of recession with capital markets in complete disarray.

Do we not deserve a bit better here? I mean I would have liked to have heard from experienced bankers, academics, or current/former Federal Reserve Governors. Instead we get the equivalent of People magazine.

Listening to these two dolts tell me to stay calm with my portfolio doesn't quite work. I need a bit more please.

I can appreciate the idea of not panicking, but there is something very unique transpiring and the fact that we get two CNBC talking heads is a fairly juvenile and cavalier approach to dealing with the situation.

Anyway, I found it a bit odd. We are experiencing extraordinary circumstances in the economy that deserve a bit more.

Jamie Dlugosch
The Rational Investor

Comments: View Comments |  Sunday March 23, 2008

I want you all to stand up, open a window and yell, "I'm as mad as hell and I'm not going to take this any more". If we are truly headed back to the 70's we may as well quote the classic movie, Network.

Friday's bailout of Bear Stearns (BSC) may very well begin the domino action that many have feared and the central bank is determined to avoid. We should all be concerned and frankly a bit mad.

I get the concept of why BSC is too big to fail if you will, but I'm not sure the benefits of rescue outweigh the negatives. Are we not simply rewarding poor and reckless behavior?

Nobody complained of course when profits at BSC were sky high during the housing boom. The lending binge generated fees of ungodly proportion and shareholders enjoyed a bull market that was propelled by the entire financial sector.

And yet when the music stops here we are left holding the bag. By we I mean American citizens that once enjoyed the fruits of a transparent and inherently fair economic system. Now, our reputation has and is being damaged by trying to fix something that ought not be fixed.

What is scary to me is that the central bank knows that the damage caused by its actions may take years to repair and yet they continue to act in this way. What does that say about their perception of the alternative?

If BSC were allowed to fail the outcome then must be worse than what we now face as a result of intervention. I guess the loss of credibility outside our borders and runaway inflation are acceptable consequences.

What in the world then are we to do as investors in this environment? Should we get out while the getting is good or at least while there is still something to get.

As an optimist it is very hard to not view this turmoil as an opportunity, but this time things may be very different. Stocks are still very expensive relative to historical levels. Keep in mind there was a time when single digit P/E ratios and 7% returns were the norm.

We still have a long way down if that is the case and leading the way will be the financial sector.

Recently we featured a bull/bear report on Citigroup (C). What should investors do now?

Well the conclusion I took from our analysis of C was to proceed cautiously. At best the stock was a buy on a dollar cost averaging basis. That would seem to still make sense in the current mess if you insist on buying at these levels.

If the CEO of BSC had no idea how bad things could get, how are we to know what lies ahead for C?

The decision to buy C is fairly simple. If you are right there could be huge gains. If you are wrong there could be large losses. There is no real way to know for certain which way it will go.

That means we are looking at a casino situation with C. Rational investors know to stay away from gambling so I would say stay away from C until this drama plays itself out.

My guess is that there will be plenty of time to get in on C if indeed the company survives. I'd rather wait until I have more information and I think you all should do the same.

As for BSC, I can't even comment and I won't. It truly is a mess.

Jamie Dlugosch
The Rational Investor

Comments: View Comments |  Sunday March 16, 2008

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.

Now for some really good news. In addition to my role with www.investorplace.com and www.investorplaceblogs.com I am re-launching my highly rated newsletter The Rational Investor as a premium, on-line only service.

The site is currently under construction and should be ready to go shortly. If you would like to sign-up early, I'm offering a huge discount of 60% off the listed price of $250 per quarter.

Drop me a line at jdlugosch@hotmail.com to learn more.

Jamie Dlugosch
The Rational Investor

Comments: View Comments |  Thursday March 6, 2008  |  Stocks: SIRI, XMSR,

March is here and spring is nearly upon us. It is my absolute favorite time of the year, but this year I'm afraid that spring will be fall with respect to the markets.

One or two more shoes appear ready to fall with respect to the market and our economy. While we have enjoyed a nice rally off the mid-January lows, the rally will be fleeting.

Friday's action whereby the major indexes all dropped by more than 2% may be just the beginning. Frankly it is hard to see the market doing anything but retesting the lows.

The headwinds for such a decline continue to persist with no sign of receding. Inflation, or at least prices for things that matter, are going up, job growth has slowed and unemployment is rising, and the credit crunch has indeed bled beyond the sub-prime mortgage market.

In early February, I was advocating a buy into the market steadily over time while keeping a small portion of the portfolio short world markets. Given where we are at today, I am not so sure that makes Rational sense.

There are many reasons for feeling this way, but I think the biggest concern I have is in the financial sector. With huge numbers of variable rate mortgages resetting in May and June, the odds are pretty good that the banks will be seeing more losses and asset write-downs.

There is no way for the market to truly rally without the participation from the financial sector. Until this mess is fixed, the market is at risk for more corrections that may finally result in a true bear market.

I'm not trying to be pessimistic here, but these issues are not simply solved over night. Thus far the pain in portfolios has failed to match the depth of the problems. Admirably the market has hung in there quite well, but get ready for round 2 to the downside.

As for my Marketocracy portfolio, I will put my monthly buying on hold and instead increase my exposure to the short side by doubling my existing short positions. I'll keep the existing long positions as a hedge to a more protracted correction.

I'm on the record as stating that the next best buying opportunity in the market will be in the fall of this year. There is no harm in nibbling as I laid out to do, but when the direction is as obvious as it appears to me now I prefer to just wait.

Jamie Dlugosch
The Rational Investor

Comments: View Comments |  Sunday March 2, 2008