The Most Heavily Shorted Stock in America

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What’s not to like about Sirius XM Holdings Inc. (NASDAQ: SIRI)? The satellite radio company created from the 2008 merger of Sirius and XM Radio has a market cap of more than $21 billion, four times larger than its nearest industry peer, Pandora Media Inc. (NYSE: P). But Sirius XM is the most shorted stock in America.

Almost 303 million shares, or 9.74% of the company’s 3.1 billion floated shares, are held short. By way of comparison, Intel Corp. (NASDAQ: INTC) is the second most heavily shorted Nasdaq stock, with nearly 237 million shares (4.8% of its nearly 5 billion share float) held short. And even Bank of America Corp. (NYSE: BAC), with a stupendous 10.65 billion share float, only has 134 million shares held short.

Sirius XM hardware has been installed in about 50 million U.S. vehicles, and new car sales are rising toward a seasonally adjusted annual rate of 16 million. Some 70% of new cars are expected to be equipped with both Sirius hardware and a free trial subscription. One estimate notes that around 45% of free subscriptions convert to paying subscribers.

The company claimed nearly 25.6 million subscribers at the end of September, about 21 million of which are paying customers. The average monthly revenue per user in the third quarter was $12.29. That is about $147 a year per subscriber, not in the same league as a cable operator like Comcast Corp. (NASDAQ: CMCSA), which claims annual revenue per subscriber of around $950, but better than the $89 annual revenue per subscriber at Netflix Inc. (NASDAQ: NFLX).

Sirius XM’s forward price-to-earnings (P/E) ratio is near 29 and its trailing P/E ratio is more than 47. Even though car sales are growing and Sirius stands to profit from those sales, these multiples are very high and are typical of high-growth stocks, not companies that have been around for more than 10 years.

Since bottoming out in early 2009 at around $0.12 a share, Sirius XM’s shares are up more than 2,600%. In the past 12 months shares have risen 25%, and that is after giving back about $0.40 a share from the late October peak.

Those 303 million short shares are telling investors that the stock is overvalued, at least in the short run. And a run-up in price of 2,600% in about five years is subject to the economic principle known as Stein’s law: If something can’t go on forever, it won’t.

Sirius XM shares were trading at $3.48 shortly before noon on Thursday, down about 0.7%, in a 52-week range of $2.68 to $4.18.