Looks like the hot potato has landed in my lap again. It's up to me to defend Sirius Satellite Radio (NASDAQ:SIRI), and that's no easy task; by any traditional valuation yardstick, Sirius is expensive. Wait. Make that "loony."

The market isn't efficient, Fool
You know what? I don't care. Traditional valuation metrics are useless when it comes to unprofitable firms. In fact, some of the best returns have come from stocks that once weren't making money. Consider this list:


5-year sales CAGR

2001 net income

5-year total return









PetMed Express




Marvell Technology




Source: Capital IQ, a division of Standard & Poor's

There's a lesson here, Fool. The market isn't efficient, and avoiding firms without earnings keeps your portfolio from opportunities where the market is least efficient. From such fertile ground, outsized returns are often sown. Again, check the table above.

Putting the hmmmmm in XM
Then there's the straight man in the satellite-radio duopoly, rival XM Satellite Radio (NASDAQ:XMSR). Though it's the market leader, with more than 6.5 million subscribers, XM has been plagued with problems, including a board defection, an FCC investigation, and a budding legal brawl with record producers. It can't help that, in the face of this adversity, management has been accused of dumping shares.

Meanwhile, Sirius has been showing steady improvement. It has topped XM in net subscriber additions for two straight quarters, for example. And when XM recently cut its projected year-end 2006 subscriber count, Sirius reaffirmed its full-year estimates.

Why does this matter? Because satellite radio is a duopoly, Sirius rises as XM wanes, and vice versa. Yet both stocks have been equally pulverized since the beginning of the year. Not exactly fair, is it?

Seizing a serious buying opportunity?
No, it isn't, and at least one investor is betting heavily on the potential turnabout: Sirius CEO Mel Karmazin. He bought one million shares each in January and May, paying a total of $10.7 million. That's a cost basis of $5.35 per stub, which puts him down roughly 21% as I'm writing this.

Consider, too, that Sirius recently lifted all of its executive stock-ownership requirements. That means Karmazin is free of obligation; he's simply buying to make money. Apparently, he believes there's plenty of money to be made above $5.35 a share.

The Foolish bottom line
Finally, please notice that I went this entire opening without mentioning Howard Stern. Well, till just now, that is. Stern is important to the future of Sirius. But he isn't the alpha and omega when it comes to satellite radio. He's a talk show host, and a well-paid one at that. All he ensures is that Sirius the company isn't going anywhere for a loooong time.

And that's what matters. Remember, Fool, Sirius is the second-stringer in a duopoly, in a market that's still experiencing outrageous growth. Unless the industry suddenly collapses, Sirius will earn a very healthy share of the inevitable gains, as will the investors along for the ride. Will you, like Mel, be one of them?

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There's more to this Duel! Check out the other three arguments, and then vote for a winner.

NetEase is a Motley Fool Rule Breakers recommendation. Fool contributorTim Beyerscan't imagine a future without satellite radio in general, and Sirius in particular. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.