By Sinéad Carew
(Reuters) – Shares in Sirius XM Holdings were down 10.5% on Friday, erasing some of their dramatic gains in the previous day’s session with analysts attributing the volatility to a short squeeze, as well as a rebalance of the Nasdaq 100.
U.S. satellite and online radio company, Sirius XM, which is majority owned by Liberty Media, last traded at $6.99 after closing up 42% at $7.81 on Thursday for its biggest one-day percentage gain since March 2009.
Analytics firm Ortex estimates that 34% of Sirius’s publicly available shares are sold short, where bearish investors borrow shares to sell them “short” with the aim of buying them back at a lower price to repay the debt and pocket the difference.
A short squeeze is when these investors are forced to quickly cover their bets to limit losses if a stock gains ground instead of falling.
Short sellers were reportedly attempting a complicated trade to make money off the reformulation of Liberty Media’s tracking stocks, related to its spin off of the Atlanta Braves into a separate stock, according to Morningstar analyst Neil Macker.
Macker said Sirius XM tracking stock has traditionally traded at a discount of around 30% to the net asset value of the underlying shares and that short selling “was based on the belief that the reformulation would help to close that gap.”
“However, the large number of shares held short along with a relatively small float provided fertile ground for a short squeeze as seen on July 20,” wrote Macker who estimates a $7.50 fair value for the stock.
Evercore analyst Vijay Jayant said the upcoming rebalance of the Nasdaq 100, of which Sirius is a member, was also a factor for the short squeeze as well as related options trading. The rebalance occurs after Friday’s closing bell.
Also with Sirius XM’s available float limited by Liberty’s 83% ownership and 5% ownership by exchange traded funds (ETFs), Jayant said he does not believe the stock’s volatility was due to any fundamental change in the business.
“We would argue Sirius XM’s valuation was already stretched given the growth prospects for the business on July 19th,” said Jayant who cut his rating for the stock to “underperform” from “in line.”
Seaport Research Partners analyst David Joyce downgraded the stock to “sell” from “neutral” and set a $4.50 price target.
Joyce modestly increased his self-pay net subscriber estimate for the year and said he is supportive of Sirius moves to “update systems, customer experience and long-term satellite capacity.”
But he said this doesn’t support the shares “wild move.”
(Reporting By Sinéad Carew, Medha Singh and Lance Tupper; Editing by Sharon Singleton)
