Sirius XM Holdings (SIRI) experienced a significant boost in its stock value, soaring by 9.1% to $5.34 on Wednesday. This impressive surge came just after Berkshire Hathaway (BRK/B) revealed that it had acquired a relatively small stake in the satellite radio company. In its quarterly 13-F filing, Berkshire disclosed its purchase of 9.7 million shares of Sirius, amounting to approximately $50 million. While this investment represents less than 1% of Sirius's market value of $20 billion, it has certainly made a substantial impact.
It is highly unlikely that CEO Warren Buffett himself was behind this purchase. Instead, investment manager Ted Weschler is believed to be the driving force. Given his role in running about 10% of Berkshire's portfolio alongside Todd Combs, Weschler operates independently of Buffett, who manages the remaining 90%. Observers familiar with Berkshire suggest that Weschler may have been responsible for orchestrating the swap of Berkshire's Sirius stock for Liberty SiriusXM tracking shares earlier this year. The speculated close relationship between Weschler and Liberty Media CEO Greg Maffei further supports this assumption.
The sharp rise in Sirius's stock price could also be attributed to the relatively low float available in the market. Liberty Media controls 83% of the company's shares, held under Liberty SiriusXM Holdings (LSXMA), one of Liberty's tracking stocks. Investors are well aware of the influence Buffett's moves can have on the market; however, it seems unlikely that Buffett had specific intentions regarding Sirius.
With Berkshire having an equity portfolio totaling around $350 billion, this small position in Sirius is not quite on par with Buffett's typical holdings. Usually, Buffett tends to make purchases amounting to at least $3 billion for Berkshire. Despite the size, the impact on Sirius's stock value has been significant and demonstrates the influence Berkshire can have even with modest investments.
Potential Reasons for Wednesday's Rally
One of the possible reasons for the rally on Wednesday could be attributed to Sirius, which also holds one of the highest short-interest ratios among Nasdaq 100 stocks. It is reported that there are approximately 171 million shorted shares, accounting for nearly 30% of the public float. Short positions involve betting that the stock price will fall by borrowing and selling shares.
However, it's important to note that a sudden surge in a heavily shorted stock, like Sirius, can trigger what is known as a "squeeze." This occurs when short sellers rush to buy back the stock to minimize their losses.
Given this scenario, it is not uncommon for Sirius stock to demonstrate volatility and experience short squeezes. We saw an example of this during the summer, when the stock soared from $5 to around $8 within a matter of days before declining again.
Based on the previous events this summer, it is possible that Sirius stock may soon face a decline.
Impact on Arbitragers and Investors
The rise in Sirius stock price is causing financial difficulties for arbitragers and other investors who have engaged in a popular trade strategy. This strategy involves buying the Liberty Sirius XM tracking stock while simultaneously short selling Sirius with the hope of capitalizing on the narrowing difference, or spread, between their prices.
Liberty Media has put forth a proposal that aims to eliminate this spread. The proposal suggests a distribution of the underlying Sirius shares to the tracker holders by Sirius itself. This would effectively create a single stock for the satellite-radio company. As a result, many participants in this trade have expressed excitement about this prospect.
Unfortunately, the spread between Sirius and Liberty SiriusXM has actually widened on Wednesday. According to estimates, Sirius is now valued approximately 40% higher than the Liberty tracking stock, compared to the 30% difference earlier this year. While Sirius is experiencing a gain in stock price, with a 3.1% increase to $26.60, the Liberty SiriusXM stock lags behind.
The substantial spread may pose challenges for a special committee of Sirius directors who need to approve the proposed combination of Sirius and the tracking stock, which was suggested in September.
