It's great to be right. Yet being right in the market is often a temporary condition. That's why it's even more important to not be too greedy during those moments when you feel spot on. So maybe my moment of ominous humility came when I pulled up a quote on Sirius Satellite Radio
Back in October, I proposed that Sirius was worthy of being considered for our new Rule Breakers growth stock newsletter. The stock closed at $3.70 a share that day. Yesterday it was trading more than 80% higher.
Yes, I am still bullish on the long-term prospects of the stock. However, now I am more than a little concerned about its near-term valuation. Sirius announced that it had lapped the 800,000-subscriber mark yesterday, and it commands an $8.5 billion market cap. When XM Satellite Radio
Don't get me wrong. I think that landing Howard Stern and Viacom's
It's troubling to me when I get emails from people wondering why Sirius can't catch up to XM and be a $35 stock tomorrow. The concept of shares outstanding isn't all that complicated, so it is alarming to see people buying a stock on the premise that the raw share price is lower than that of a different stock. Would these people be buying XM instead if it declared a 10-for-1 stock split? It's a haunting thought.
It's slightly less troubling but still disturbing to see folks who understand that you need to multiply a stock's price by the shares outstanding to arrive at its current market value still ignore the fact that a young company like Sirius also has a ton -- and we're talking literally a couple hundred million -- of additional shares in options and other dilution that will be tacked on as the stock appreciates.
Yesterday an analyst raised his target price on Sirius to $6.75, and that mark was struck just minutes into the trading day. A cautious Seth Jayson wondered last month whether signing Stern was worth $1 billion the day that Sirius announced its $100-million-a-year deal with the notorious radio show host. A billion bucks for Stern? That's peanuts! The stock has actually tacked on nearly $5 billion since Stern came aboard.
Buying into a strong growth stock early in its life cycle is great -- it's the very basis of our Rule Breakers premium research offering. But that should never mean checking logic and common sense valuation at the door. Sirius is going to have a great future, but a cynic would be right to wonder whether it's cashing too many of tomorrow's paychecks today.
Tread carefully.
Longtime Fool contributor Rick Munarriz thinks that satellite radio will be a huge industry in the years to come. He does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.
