Sirius SIRI Why You Should Never Buy Because it is Cheap

Jan 30, 2009: 2:00 PM CST

I remember hearing all about how wonderful the Sirius/XM Satellite Radio merger was and how you should be buying stock and especially that you should buy because price was around $2.00 or $3.00 and if price moved just a little bit to $4.00 or $6.00 that you would double your money, not to mention if it got up to $10.00 or $20.00 over time.  However, that never happened – in fact, the opposite happened, which underscores a major point in trading.  DO NOT buy a stock only because it is cheap.  It might be ok to buy a cheap stock, but price should not be your #1 motivating (or heaven forbid ONLY) factor.

Let’s see this play out in SIRI.

SIRI Sirius

The merger of Sirius Satellite and XM Satellite Radio took place on July 29, 2008… right where I have the arrow that points to the “Dang it!” area where I’m sure many investors figured this would be their last chance to buy because the stock was sure to skyrocket on the news of this merger and what it might mean.  I’m not here to discuss the news or fundamentals – many sites do that far better than I can – but I’m here to analyze the effect on price after that event.

I remember being tempted myself in 2006 and 2007 to buy Sirius for the long-haul because the stock traded around $4.00… then $3.00 and I figured just like everyone else that Sirius was bound to be a long-lasting company and that the share price at that level was an immense bargain.  Millions of other people thought the exact same thing, as evidenced by the daily volume of that time, which averaged near 200 million shares per week.

I remember also the hype around the XM Satellite Radio merger and how that was discussed so frequently at the time.  Notice that on the week of the merger, almost 800 million shares traded hands that week – a phenomenal, staggering amount.  However, the best play at the time was the one that was far from obvious – you should have shorted aggressively at that point rather than bought aggressively.

Technically, price had broken a long-standing down-sloping trendline which arguably formed a descending triangle (notice the resistance line from the falling 20 week EMA).  After the breakdown in June 2008, price formed a bear flag retracement (or ‘throwback rally’) to test the confluence resistance of the trendline and falling 20 week EMA as overhead resistance which held, forming a type of shooting star and then collapsing into new price lows few if any thought possible.

It’s tempting to say “If I buy thousands of shares at $2.00 per share and price goes to $4.00 per share, then I’ve doubled my investment.”  Moreover, it’s tempting to fall into the trap of “When a stock is cheaper, I can buy more shares.”   Which sounds ‘sexier’ for a $100,000 investment:

200 shares of a Google-type stock at $500  or
50,000 shares of a SIRI-type stock at $2.00 ?

I’ll let you be the judge but I implore you to think beyond your greed and trade with your senses, not your emotions.  Stick to middle-of-the-road companies that trade between $20 and $80 per share for investments, give up the possibility of doubling your money in a month, and work to manage your risk.

I had a conversation with a broker last night who says he has more than a few clients who want to buy  thousands of shares of companies – particularly financial companies now – trading less than $3.00 per share.  His response to them?

“Fly out to Vegas, pick a color on the roulette wheel, bet it all, then watch them spin the wheel.  Hey, at least you’ll have more fun that way and you’ll actually have better odds – 47.5% – of literally doubling your money overnight than if you bought a penny-stock!”

My thoughts exactly.

Corey Rosenbloom
Afraid to Trade.com

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11 Comments

11 Responses to “Sirius SIRI Why You Should Never Buy Because it is Cheap”

  1. clint Says:

    Great point of view, but can you show more proof? But anyway nice blog and count on me to post comments on your blog more often. Good day.

  2. Corey Rosenbloom Says:

    Clint,

    The first ‘trade’ I took back in high school was in a penny stock that moved from $0.05 to $0.60 in a month. I bought in about $0.50. It went to $0.25 – I sold out, it then went to $1.20 then fell a few weeks later to $0.

    Other recent examples off the top of my head include SOEN (a solar energy ‘wonderstock’ that’s moved from $2.00 to $0.20), CROX which moved from $75 to $1 in a year, and any number of financial stocks trading less than $2.00 provided they still exist. Lehman and Bear Stearns – as solid as people thought they were – no longer exist. The well-celebrated Bill Miller fell victim to this trap and it cost his investors millions. Also Jones Soda (JSDA) which even I was bullish on and Cramer had recommended as a “must buy” stock. I drink Jones soda beverages frequently. It peaked at $32 and now trades at $0.30.

    My argument is – no matter how wonderful you think the company is – stay the heck away from stocks under $5 unless you really, really know what you’re doing.

  3. Bond Trader Says:

    FYI – bond market currently in a panic.. would love to hear your thoughts.. i feel we are in an ABC correction, and the 5min charts have us in the 5th of the 5th of C. But the panic comes as we are at the possible peak of the “wave of indecision” wave 4.

  4. Corey Rosenbloom Says:

    Bond Trader,

    It was said on my blog – not at first by me, but by a reader in the comment section – that after the stratospheric rise in bond prices into 2009, that there would likely be some sort of nasty action. I think the quote was something like “It ain’t gonna be pretty” or something like that.

    This is the normal activity after such a large ‘flight to safety’ or other factors that caused such a steep rise. The excess is being shaken out. I’ll try to tackle that count over the weekend.

  5. complacentpanda Says:

    While I know that many people are extremely successful at trading penny stocks, I don’t know of anyone who successfully buys and holds penny stocks. At least, I can’t think of anyone. And those who do trade penny stocks have fairly sophisticated technical analysis skills, not to mention they pick and choose what they want to buy or short.

    Love the Vegas quote, Corey. My sentiments exactly. Although, without those willing to take risky bets against my not so risky bets, I definitely wouldn’t be as interested in finance.

  6. Anonymous Says:

    SIRI no longer trades as a stock per se, it is now a call option on whether the company even survives — highly unlikely, in my opinion.

    Corey, we are in agreement on this.

  7. Corey Rosenbloom Says:

    Anon,

    Good point. Also, I didn’t mean to pick on SIRI – I was just thinking about where the stock was trading and it hit me as an inspiration to post on why it’s generally NOT a good idea to buy a stock JUST because it was cheap. I could have chosen dozens of examples, but it was the first to come to mind.

  8. chartsandcoffee Says:

    Technical view of $SPX from the late 1920s – http://chartsandcoffee.blogspot.com/2009/01/keeping-eye-on-big-picture-s-500-from.html

  9. BOB Says:

    YOUR THOUGHT I THROUGH IN A TRASH CAN , YES GOOD BUDDY , IF YOU KNOW THE CHYSTAL BALL , YES YOU WOULD BE ,I WON T SAY IT ,AS IM TO RELIGIOUS TO SAY ,,, BUT ANYWAYS ,, YOUR THOUGHTS IN MY BOOKS WENT TO THE TRASH

  10. data recovery Says:

    good point. Before buying any stock we should review fundamental fo stock carefully.

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