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Shares of Sirius XM Radio (Nasdaq: SIRI  ) fell 4% yesterday, after Gabelli analyst Brett Harriss downgraded the satellite radio giant.

Harriss, who has been covering the media and entertainment sector for Gabelli & Co. since 2008, feels that Sirius XM has limited upside at its present valuation. He's cutting his rating from "Buy" to "Hold" despite his fondness for the company in general.

Few are arguing that Sirius XM is cheap these days.

The $1.49 share price may seem like a fast-food bargain, but investors need to remember that there are 6.4 billion shares outstanding. Tack on the roughly $3 billion in long-term debt on Sirius XM's balance sheet, and we're talking about a company with a $9.5 billion market cap and $12.5 billion in enterprise value.

Harriss suggests Liberty Capital (Nasdaq: LCAPA  ) as a thinking investor's play on Sirius XM.

This argument has been floating around since Liberty Capital lucked into a 40% preferred share stake in Sirius XM, after lending the then-desperate satellite radio provider a chunk of change last year.

Liberty Capital's stake is currently valued at nearly $4 billion, whereas Liberty Capital itself commands a market cap of $5.2 billion.

But wait, says the infomercial announcer! There's more!

Liberty Capital also owns the Atlanta Braves and GPS tracking solutions specialist True Position. In addition, it holds small stakes in several familiar stocks, including a 14% stake in Live Nation (NYSE: LYV  ) and 2% stakes in Sprint Nextel (NYSE: S  ) and Motorola (NYSE: MOT  ) .

By Harriss' math, Liberty Capital is trading at a 40% discount to the value of its portfolio. However, it would be hit with a huge capital gains tab if it were to ever cash out its Sirius XM stake, given its microscopic cost basis. Spinning off those holdings would be one tax-advantaged option, likely narrowing Liberty Capital's discount for the remaining holdings with kinder cost basis points.

In the end, Liberty Capital offers a way to buy into Sirius XM at a discount -- but with a diversified portfolio that would smooth out Sirius XM's volatility. Gunslingers may not care for that kind of safety -- especially if Sirius XM itself continues to appreciate at a headier clip than the rest of Liberty Capital's holdings -- but it may appeal to those, like Harriss, who feel that Sirius XM itself has gotten ahead of itself this year.

Would you rather own Liberty Capital or Sirius XM? Share your thoughts in the comment box below.

Sprint Nextel is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the stocks in this article. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 10, 2010, at 11:38 AM, bridgesafe wrote:

    I'll hold my siri, and buy more if it fall back to $1.40

  • Report this Comment On November 10, 2010, at 11:39 AM, nazareth2 wrote:

    Is the Gabelli analyst Brett Harriss trying to get the stock price down so he can now aquire shares at a lower price? Find out if they are buying stock...

  • Report this Comment On November 10, 2010, at 11:53 AM, jwc99 wrote:

    A lot of good news is valued into Sirius XM but continuing growth from Ford and GM plus gains in the used car market should help the stock to drift upwards. The whole Howard Stern thing is overblown and will probably not have much of an effect either way once the dust has settled.

  • Report this Comment On November 10, 2010, at 12:08 PM, toomany4gong wrote:

    Are you kidding me? SIRI is trading 1000% cheaper than its projected value 5 years from now. You don't invest in penny stocks for its present value. You invest in them for their future prospects.

    As far as mobile-audio-entertainment goes, there's no competition other than foreign satellites. Pandora and Slacker may replace CD or MP3 but not Radio.

    SIRI will be to Radio what Amazon is to Shopping.

    Strong Buy, Super Strong!!!

  • Report this Comment On November 10, 2010, at 12:15 PM, rouben45 wrote:

    Relax Guys, the house is not on fire, today I increase my position on SIRI by 30000 shares, I am hoping for more buying opportunity. Medium term long terms SIRI is probably the surest bet for a substantial profit. Everyone has an opinion and this is mine. I bought Ford at 1.88 $ against every body’s advice and I bout a lot of it. See what happened. I bought LEAR, just out of Chapter 11, around 53 $ now trading $ 90 after only 7 months. Don't listen to these manipulators; they all have agenda for special interest. They are paid to bash the stock like SIRI against all Logic. How cares if Howard stays or goes , actually I prefer that he goes, 80 Million/year is good money to waste on his crap that people are already tired of it.

  • Report this Comment On November 10, 2010, at 12:29 PM, homer985 wrote:

    While I don't know about shorting Sirius and going long Liberty at this point - you may be okay for a short term trade, however you really have to compare these 2 stocks side by side before you really take that jump.

    For example... here are some % increase comparisons of SIRI to LCAPA from certain points in time to the current pps, starting with February 17, 2009 - the date of the Liberty Transactions:

    17-Feb-09 SIRI $0.16 $1.49 931.25%

    17-Feb-09 LCAPA $5.30 $59.37 1120.19%


    1-Jul-09 SIRI $0.46 $1.49 323.91%

    1-Jul-09 LCAPA $13.39 $59.37 443.39%

    4-Jan-10 SIRI $0.65 $1.49 229.23%

    4-Jan-10 LCAPA $24.72 $59.37 240.17%

    1-Apr-10 SIRI $0.84 $1.49 177.38%

    1-Apr-10 LCAPA $36.73 $59.37 161.64%

    1-Jul-10 SIRI $0.93 $1.49 160.22%

    1-Jul-10 LCAPA $41.72 $59.37 142.31%

    1-Oct-10 SIRI $1.24 $1.49 120.16%

    1-Oct-10 LCAPA $52.87 $59.37 112.29%

    As you can see, LCAPA has tracked SIRI very closely for the last 21 months. While Sirius has gone a little ahead of Liberty here in 2010 -- Liberty is still up huge since the start of this partnership.

    So what's it mean? Everyone knows that Liberty is still undervalued. It was undervalued BEFORE the Sirius deal... that was the problem with using tracking stocks, most investors don't understand them and avoid them. It's why Malone is getting away from slowly but surely and splitting his companies up.

    Okay, that gets off topic - but the point is, Liberty likely does have a lot of room to grow. Much of its 1120% increase over the last 2 years is because of the 931% increase in value of its largest asset... but it's still undervalued. Why? I get what Harriss is saying, however, the issues of LCAPA prior to the Sirius deal are still there. The question is, will investors ever get it and allow the value of LCAPA to ever mature to where it should be?

    I won't dispute you, I've always felt that LCAPA is a great investment, with more muted risk. However, it should be noted that if something happened to Sirius -- Liberty too would be effected, with it being its largest asset tracked by LCAPA. I myself would have purchased LCAPA back then, however I already diversified most of my gains in XM prior to the merger. What's left is LT... no reason to mess with it then or now.

    LCAPA will continue to grow, as long as SIRIS grows, likely closely tracking it. And if ever investors figure out LCAPA (not likely as a tracking stock), it may grow quicker. Or, if/when they eventual do the split-off -- which would make a lot of sense.

    As for shorting Sirius and going long the other? With the track record these two have with pps growth, I don't know that that would be a very efficient hedge... and in fact, could really slow your investment growth between the two -- outside of a small short-term trade.


  • Report this Comment On November 10, 2010, at 12:31 PM, akbarcaskey678 wrote:

    Doing this stragety is like buying insurance after your house burns down. This may have worked if the trade was made when SIRI was at $1.55 or so, but not now.

    I would not short SIRI because I already tried doing this with the september options. I started shorting SIRI in June and the stock closed at the Sep expiration at 1.00, I used the $1.00 strike price and made a minimal amount of cash. My point is SIRI will move but not low or high enough to make any real money.

    Your better off doing a spread with selling the Dec $1.50 put and buying the Jan 11 1.50 call. Since some people including myself that are long SIRI bought shares while it was below a $1, the excercise procedes will make hundreds.

  • Report this Comment On November 10, 2010, at 12:33 PM, homer985 wrote:

    Sorry everyone, maybe this will be easier to read... not easy doing charts in comment area. Looking at it like this you can see the extordinary growth both have gone through:

    17-Feb-09... SIRI... $0.16... $1.49... 931.25%

    17-Feb-09... LCAPA... $5.30... $59.37... 1120.19%

    1-Jul-09... SIRI... $0.46... $1.49... 323.91%

    1-Jul-09... LCAPA... $13.39... $59.37... 443.39%

    4-Jan-10... SIRI... $0.65... $1.49... 229.23%

    4-Jan-10... LCAPA... $24.72... $59.37... 240.17%

    1-Apr-10... SIRI... $0.84... $1.49... 177.38%

    1-Apr-10... LCAPA... $36.73... $59.37... 161.64%

    1-Jul-10... SIRI... $0.93... $1.49... 160.22%

    1-Jul-10... LCAPA... $41.72... $59.37... 142.31%

    1-Oct-10... SIRI... $1.24... $1.49... 120.16%

    1-Oct-10... LCAPA... $52.87... $59.37... 112.29%

  • Report this Comment On November 10, 2010, at 12:36 PM, southernbeachguy wrote:

    Gabelli is a no name, no creditability firm that that is trying to get customers by Bashing the most recognized Company on the Board. Rick, The Street and other Nobody firms have been Bashing Sirus for 2 years now and losing their customers the opportunity to make the most money of their lives. It is funny that the Big Name Analysis are saying Buy Sirus. Rick, I think I remember you saying to sell Sirus when it was 20cents. I am sure glad I didn't listen to you. I actually thought the Fool was starting to see the light, but with you still Bashing Sirus, they haven't changed their ways. I guess anyone with the name "The Fool", doesn't change their foolish ways.

  • Report this Comment On November 10, 2010, at 1:26 PM, Austin77478 wrote:

    Mr. Harriss doesn’t have the capacity to move Sirius’ stock. The general market has been selling off lately. As a matter of fact, the first time I heard of him was yesterday. The and MF followers have lost tons of money. SAAR would go up next year. SAC would go down next year. Things are looking well for Sirius. Mel has never failed in his media's business career.

  • Report this Comment On November 10, 2010, at 1:32 PM, Valuestocksonly wrote:

    Rick are you still long SIRI? Auto sales set to soar next year. Which means alot of used sat ready cars. Retail radios actually for sale (It has been a long time that SIRI has had a retail sector). Howard, NFL, etc etc.. OOPs forgot Latin America! These analysts should have been downgrading 3 months ago.

  • Report this Comment On November 10, 2010, at 6:29 PM, PokerRon wrote:

    SIRI is a steal at $1.46. Within 2 weeks it will be pushing $1.60, mark my words. Every so often the clowns at Motley Fool and The Street and unknowns like this Bret Harriss need to make headlines by knocking SIRI - one of the most heavily traded stocks on NASDAQ. They were doing it when Sirius/XM was $0.15 a share - they just can't reconcile that were, and still are, wrong. Strong buy.

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