Is Sirius XM an Underdog -- or Just a Dog?

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, we've also got leading analysts who find the dings in a company's armor and correctly call its fall. Our "underdogs" have earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Today I'm looking at satellite radio operator Sirius XM Radio (SIRI 0.98%), which is up 76% from the low point it hit late last year, but faces concerns about its direction when Liberty Media (STRZA) takes control.

It's been an up-and-down ride, so if there are investors who've scored big by correctly predicting which stocks will fail, it may be worth our while to check out those they think will succeed. Yet it's hard to swim against the tide of negativity, and 30% of the All-Star CAPS members weighing in on the radio star think it will lose to the Street.

Sirius XM Radio snapshot

Source: FinViz.com. N/A = not available; Sirius doesn't pay a dividend.

Of course, not every short sale goes as planned, which makes shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. And you don't want to end up with fleas by lying down with dogs until you do your homework.

Get your motor running
It used to be as goes General Motors (GM -0.17%) so goes the country. While that's a long time ago in a land far, far away, the health of the auto industry still carries a lot of economic weight, so the relatively strong September performance by automakers carries the hint of success among those industries that thrive with the car companies.

Analysts are now looking for non-terrestrial radio stations to see the trickle-down benefits of the higher sales. With annual seasonally adjusted numbers tacking just under 15 million cars, one analyst predicts Sirius will add as many as 456,000 net new subscribers in the third quarter.  Pandora Media (P), with its Internet radio technology in brands from BMW and GM to Ford (F 0.66%) and Toyota, is looking to record better gains, too.

Yet Sirius will likely fare better financially. As Pandora records, the satellite radio operator pays a lower percentage of revenue than do Internet radio providers, giving satellite radio a significant cost advantage. It's just going to cost Pandora more than Sirius for every new subscriber they get.

The better subscriber numbers will help Sirius in other ways, too.

This is Sirius
As my colleague Rick Munarriz notes regarding the upcoming Liberty Media investor conference tomorrow, while placating the media conglomerate's shareholders is certainly a priority, Sirius needs to have them hang on to their shares when the spinoff occurs (notice no waffling "if" language here) to prevent a share meltdown. Sirius has made serious gains over the past year, in no small part because of John Malone's attempt to gain control of the satellite operator, but it's just as true the ear-in-the-sky has done itself good, too. It's turned profitable and has been regularly growing its subscriber base.

True, Pandora has been growing faster, with the number of active listeners rising 49% last month to 58.3 million, but it still looks wildly overvalued even at its current depressed valuations compared to its extraterrestrial rival.

Analysts are looking for Sirius to double earnings this year on the basis of a 12% jump in revenue. Of course, when a company's just turning profitable, the magnitude of change can appear enormous, but it shows Sirius is moving in the right direction.

Moving out of the break-down lane
While the Liberty Media takeover is a wild card and the sputtering economy could drag auto sales back down again, Sirius XM Radio seems to have found the road to recovery at last. I've rated it to outperform the market indexes on CAPS, but tell me in the comments section below if you think it's still got the green light for growth.

There's no need to fear...
There's a lot more at stake for Sirius. Whether you're already an investor in it or thinking of becoming one, check out the Fool's new premium research report on the satellite radio specialist, which offers in-depth analysis of key opportunities and risks, as well as insight into the company's unique advantages. It also comes with a year of updates. To get your copy now, simply click here now.