Bullish counterpoints on Sirius XM and Pfizer; Stay away from cryptocurrency Tether
1) One of the biggest mistakes investors make is falling in love with the stocks they own (or the CEOs of the companies)...
Sometimes it works out great – as it has for folks (like me) who fell in love with Warren Buffett and Berkshire Hathaway (BRK-B) – but, in general, allowing your emotions (especially "commitment bias") to influence your investment decision-making is a recipe for disaster.
Just ask those who owned once-revered stocks like AOL, AIG (AIG), Lucent Technologies (the most widely held stock in America in 1999), Fannie Mae (FNMA), Intel (INTC), IBM (IBM), Lehman Brothers, General Motors (GM), AT&T (T) Cisco Systems (CSCO), and General Electric (GE) (the latter four were the world's most valuable companies in the 1950s, 1970s, 2000, and 2005, respectively).
The inverse is also important: the ability to rethink a stock you don't like.
For example, I was short the stock of Netflix (NFLX) in 2010, believing that the stock was wildly overvalued because its nascent streaming service was a lousy business that would soon face deep-pocketed competition.
But then the co-founder and CEO at the time, Reed Hastings, wrote me an open letter... And after I met with him, I covered my short, eventually went long, and made seven times my money – although it should have been 100 times! (For details, see my June 7, June 10, and June 11 e-mails.)
I was thinking about this because in last Wednesday's e-mail, I analyzed satellite-radio company Sirius XM (SIRI) and concluded that "I would avoid the stock."
In response, reader John C. of investment firm Lycka Advisors e-mailed me:
The key difference in our takeaway is that you view satellite radio as a service that no one wants/needs. I have a completely different perspective on that, from discussing with dozens of people firsthand, who have subscriptions to both streaming and satellite radio. I would assume neither of us have firsthand accounts from millions of users who don't stream music, or live in an area where cell phone coverage isn't consistent enough to do so... or long-haul truckers... There are still others who subscribe for content purposes like talk radio personalities or sports.
Totally ok to disagree on that view... it's what the story hinges on. In talking with a dozen institutional money managers, they all agree that it boils down to the subscriber numbers and/or ARPU [average revenue per user], which are a guess.
But as John continued:
HOWEVER, I think the technical set up is so asymmetrically in your favor that it's worth making a bet here. I also think there are several "levers" to pull, including divesting and spinning-off Pandora, which the market is basically valuing at zero.
If they are able to hold EBITDA [earnings before interest, taxes, depreciation, and amortization] and net income constant (I admit that's an if) and they further de-lever and repurchase shares at the rates they have guided... holding the multiple constant the stock would be a DOUBLE in three years, while paying you a 4% dividend. That, in my opinion, is why Berkshire continues to add to their position.
I thought John's opinions were thoughtful enough that my readers would be interested in hearing them, so I asked if I could share his full write-up that he sent me and if he could tell me a bit about himself. He agreed, and wrote back:
I am a former institutional equity salesman (20 years, mostly with what is now TD Cowen) turned Portfolio Manager (recently with Alpine Global). I am not managing institutional money at the moment – my most recent endeavor is my own entity, Lycka Advisors, acting as an independent investor and consulting with (mostly) hedge funds. My full bio is on LinkedIn here.
My interest in SIRI began earlier this year. I expected the arbs [arbitrage investors] would cause a short squeeze, again, as they did in July 2023. After the split-off I couldn't get over how "orphaned" this situation became. As my write-up highlights, literally everyone involved, outside of Berkshire Hathaway, has been a large net seller from a technical/transaction perspective. I talked to several of them myself (old sales/personal relationships) and this direct quote from a top-five Liberty Media holder was typical: "This one was in the arb book, so it's an automatic sale following transaction close." [On September 9, Liberty Media (FWONA, FWONK, LLYVA, LLYVK) spun off Liberty Sirius XM Holdings and merged it into Sirius XM.]
So... I sharpened my pencil a bit and this is what came out of it. I have no ulterior motive here and I am not being paid by anyone for this specific work/opinion, just thought it was an interesting long-term opportunity.
Talking to my contacts, most seem skeptical and need to see where the subscriber numbers go before they can dip a toe. I honestly believe that's the major opportunity.
I've posted John's 19-page write-up right here, in which he concludes:
SiriusXM is a provider of curated music, talk, sports and other content (exclusive and unique in many cases). Their subscription-based business model is delivered via a proprietary network of satellite receivers OR internet apps (SiriusXM and Pandora branded). There are SiriusXM receivers in ~ 1/3 of US registered cars and 1 in 7 American adults subscribe.
Over the last two years SIRI has encountered a perfect storm of both technical pressures, due to the unwinding of Liberty Media's HoldCo structure and fundamental headwinds, in the form of plateauing subscriber growth. Not only that, capex will peak (net income will trough) in 2024 as they construct/launch all new satellites into orbit. The combination has left shares of SIRI somewhat orphaned and valued below 98% of US-listed stocks, during a "trough results" year.
John also noted that Berkshire Hathaway has been scooping up shares of Sirius (as I mentioned in my October 22 e-mail, that was what first got me interested in taking a closer look at the company):
Someone who sees through this is Berkshire Hathaway, perhaps the most successful institutional investors of the past half-century. Berkshire has used the technical to their advantage, accumulating a 31% stake (mostly) over the last 12 months. SIRI shares hover at a 12-year low, while just off its all-time high levels of revenue and cash generation.
And as John continued:
Consensus estimates suggest that SIRI will generate more free cash flow than its current market cap in less than 6 years... a ~ 20% normalized FCF yield. Not only are they putting all new satellites in the sky, but they are also actively buying back $1.17 billion in stock, paying down over $1 billion in debt and paying a 4.5% dividend on their equity... simultaneously.
Sirius has many scarce assets, content and a unique distribution channel that would make it an interesting acquisition target for a large media/tech company or a streaming service. Even at a substantial premium to current prices, purchasing SIRI would be massively accretive to most US companies.
A base case valuation offers upside of 25-50%. One could easily see much more appreciation in the event of a hard catalyst like a spin-off of Pandora or a takeover. At the same time, its nearly a zero probability that shares could trade down a similar amount, absent a huge bear market or continuous catastrophic subscriber attrition. On that note, I couldn't find a single subscriber amongst those I knew, willing to give up their subscription (already Spotify or iTunes subscribers as well).
Finally, as John wrapped up:
SIRI is one of the cheapest and most asymmetric set-ups I have ever seen in a liquid, mid-cap stock.
Thank you for sharing, John!
I'm always interested in hearing different perspectives and takes on stocks that I discuss – it's part of why I love writing these e-mails and hearing from my wide range of readers.
While I'm not fully convinced on Sirius with John's argument, my team and I are going to take a closer look at the company and stock.
If we decide it's a buy, subscribers to our flagship Stansberry's Investment Advisory will be the first to know. If you aren't a subscriber already, you can find out how to become one – and learn how to gain instant access to our full portfolio of open recommendations – as part of a special presentation by clicking here.
2) Along the same lines, I wrote negatively about pharma giant Pfizer (PFE) on October 8, October 10, and October 11.
My friend, Yale School of Management Professor Jeffrey Sonnenfeld, and his colleague Steven Tian have a more optimistic view and outline what Pfizer needs to do to turn itself around in this recent Fortune article: As activist Starboard engages constructively, here's a potent prescription for Pfizer's future success under Dr. Bourla's watch. Excerpt:
Last week, we stood in support of Pfizer CEO Dr. Albert Bourla, responding to unfounded attacks on him in the media from anonymous sources, and we expressed our initial skepticism about aspects of Starboard Value's activist position in our Fortune column. This was fortified by a meticulously detailed, original 36-page research slide deck. We received thunderous positive feedback – and many experts joined us in questioning the activist assault on Pfizer.
That chorus of public skepticism grew louder after Starboard's Jeff Smith presented his highly-anticipated slide deck yesterday during a special CNBC interview with David Faber and at Ken Squire's 13D Conference, with critics noting it contained a lengthy case for change but few remedies or solutions.
However, what we noted was a subtle shift in Starboard's approach, with Smith asserting "We're excited about what's there... and we think the future [of Pfizer] will be better than people think." He refused to be baited into calling overtly for CEO change, declaring "I don't know why we need to be nasty. We like to work with everybody [there]".
Smith is right: Pfizer's future, under Dr. Bourla's leadership, could indeed be much brighter than many expect. Here's how Dr. Bourla is already well on his way toward getting Pfizer back on track – as well as the next steps Pfizer needs to take to turbocharge its prescription for success.
I'm less persuaded here than with Sirius... but, as always, I like to share contrary viewpoints with my readers.
Overall, as I said on October 10 about the stock:
Pfizer remains in the "too hard" bucket for me – in other words, I stay away. So I would remain on the sidelines with the stock.
3) I've written negatively about cryptocurrency Tether well over two dozen times (you can see and search my article archive here) – most recently on September 12, in which I shared this in-depth Wall Street Journal article, The Shadow Dollar That's Fueling the Financial Underworld, and concluded:
In light of this, I hope the U.S. government cracks down on Tether – ideally banning it completely.
As a result, my view that anyone holding Tether is taking a huge risk hasn't changed... but the primary reason for it has. I no longer think it's likely that the operators of Tether are taking the hard currency they receive in exchange for Tether and stealing it or investing it recklessly – there's no need to do that when they can earn 4% to 5% risk-free.
Rather, the risk is that one day, the U.S. government, perhaps in coordination with allied countries, suddenly makes Tether illegal, and, instantly, any American holding it can no longer access their account (which has become worthless).
Well, the odds of this risk coming to pass just went up a lot in light of this recent report in the WSJ: Federal Investigators Probe Cryptocurrency Firm Tether. Excerpt:
The federal government is investigating cryptocurrency company Tether for possible violations of sanctions and anti-money-laundering rules, according to people familiar with the matter.
The criminal investigation, run by prosecutors at the Manhattan U.S. attorney's office, is looking at whether the cryptocurrency has been used by third parties to fund illegal activities such as the drug trade, terrorism and hacking – or launder the proceeds generated by them.
The Treasury Department, meanwhile, has been considering sanctioning Tether because of its cryptocurrency's widespread use by individuals and groups sanctioned by the U.S., including the terrorist group Hamas and Russian arms dealers. Sanctions against Tether would generally prohibit Americans from doing business with the company.
And as the WSJ continues, Tether is widely used in the financial underworld:
Tether and its cryptocurrency, also called tether, have been a matter of growing concern for federal regulators and law enforcement. Unlike more volatile cryptocurrencies, tether's value is pegged to the dollar, making it an ideal substitute in places where use of the U.S. currency has been banned by U.S. regulators.
Tether is the world's most traded cryptocurrency, with as much as $190 billion changing hands each day. It is also a vital financing tool for several of the U.S.'s top national-security concerns. These include the North Korean nuclear-weapons program, Mexican drug cartels, Russian arms companies, Middle Eastern terrorist groups and Chinese manufacturers of chemicals used to make fentanyl, the Wall Street Journal has previously reported.
All this is more reason to stay far away from this crypto... and if you own it, get out and convert it back to dollars!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.