Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) revealed last month that it initiated a position in Sirius XM Radio (NASDAQ:SIRI) late last year, but even having Warren Buffett as a shareholder isn't going to keep naysayers away. Sirius XM closed out February with 277.5 million shares sold short.
The satellite radio provider routinely tops the list of Nasdaq's most shorted stocks. Its low share price and the stock's volatile past -- this is a company that was on the brink of filing for bankruptcy in early 2009 -- are irresistible traits for speculators. However, Sirius XM's short interest a month earlier was just 255.7 million shares. A year ago there were just 165.8 million shares of the stock being shorted.
Berkshire Hathaway's arrival should've sent the boo birds scurrying away. If Buffett -- the greatest investor of our time -- is betting on Sirius XM, who would second guess that wisdom by betting on the stock's demise? Well, we now know the answer, and that answer is that a lot of people still don't believe in Sirius XM as an investment.
Betting against Buffett
Berkshire Hathaway as an investor -- a revelation made in an SEC filing in mid-February -- understandably sent shares of Sirius XM higher. The 166.6 million shares of Sirius XM that Buffett and his team snapped up in Q4 may not move the needle at Berkshire Hathaway. We're talking about an investment that is worth about $883 million at current prices by a company commanding a market cap of $430 billion. However, Buffett wouldn't be buying into Sirius XM at all if he didn't feel that it couldn't beat the market. At the very least he's not buying into the satellite radio monopoly if he thinks that it's heading lower.
Berkshire Hathaway's arrival was validation, but more people decided to short Sirius XM last month than to cover their positions. They're betting against Sirius XM, but they're also betting against Buffett.
It's easy to see why Buffett was drawn to Sirius XM. Despite the rocky past that found the stock bottoming out at $0.05 in early 2009 when it seemed as if the completed merger between Sirius and XM a few months earlier wouldn't pay off, Sirius XM has been a cash-flow lover's dream in recent years. Sirius XM has been consistently profitable since 2010. Its user base keeps showing consistent sequential growth, up to 31.3 million subscribers by the end of last year.
The juicy model with low variable costs can be a goldmine when subscriber counts are rising. Sirius XM topped $1.5 billion in cash flow last year, money that it's been using to buy back shares, initiate a dividend, and tackle its debt.
It's easy to see why folks were shorting Sirius XM eight years ago. It was a mess. It's harder to see why so many investors are betting against Sirius XM -- and now Berkshire Hathaway -- today.
Editor's note: A previous version of this article contained an incorrect number for the shares of SIRI that Berkshire Hathaway purchased and their value.