The stock of Sirius XM Holdings (ticker: SIRI), the leading satellite radio operator, experienced a significant surge of 42% on Thursday. This surge can be attributed to a combination of short covering, the unwinding of a spread trade involving Liberty SiriusXM, and possible buying related to the rebalancing of the Nasdaq 100 index.
Short Covering and Strong Performance
Short interest in Sirius XM recently stood at 33% of the available float, making it one of the highest ratios among companies in the Russell 1,000 index. This high short interest has driven the stock price higher as investors engage in short covering. The stock had already been performing well, with a 7% increase on Wednesday and a 41% gain over the prior month.
Unwinding of a Trade
In addition to short covering, another factor contributing to the surge in Sirius XM stock could be investors unwinding a trade involving Liberty SiriusXM Group (LSXMA), a tracking stock created by Liberty Media. The trade involved being long on the tracking stock while simultaneously being short on Sirius XM stock. A tracking stock offers investors economic exposure to a business or investments without actual ownership of the underlying assets.
Rally in Shorted Stocks
According to analyst Jeff Wlodarczak of Pivotal Research Group, there has been a significant rally in the most shorted stocks over the past six weeks, and SiriusXM has been one of the beneficiaries. This rally could explain the substantial increase in the stock price.
Hedge Fund Strategy
The spread trade between Liberty SiriusXM and Sirius XM has been popular among hedge funds, which are among the largest holders of the Liberty tracking stock. The trade took advantage of the tracker trading at a discount of approximately 35% to the value of its assets in June. The primary asset held by Liberty SiriusXM is approximately 3.2 billion shares of Sirius XM stock, with a smaller asset being a roughly 30% stake in Live Nation (LYV), a live music company.
The significant surge in Sirius XM Holdings stock indicates strong market interest and positive investor sentiment.
A Massive Move in Sirius XM
This trade has recently caught the attention of investors after Liberty Media approved a move to separate the Liberty Sirius XM tracking stock into two distinct entities: one tracking Sirius XM and the other tracking Live Nation. Initially, many investors were optimistic about this simplification, assuming it would lead to a narrower spread relative to Sirius stock. However, the complete opposite has occurred, resulting in a significant disconnect.
The spread between Sirius and Liberty Sirius has now widened to approximately 55%. Analysts estimate that Liberty SiriusXM’s stakes in Sirius XM and Live Nation are approaching $80 per share. With this trade turning sour, hedge funds may have reached their self-imposed “drawdown limits” and may be unwinding their positions due to substantial mark-to-market losses.
Interestingly, despite the underlying stock’s gain, Liberty SiriusXM stock (LSXMA), which usually mirrors Sirius XM shares, remained largely unchanged on Thursday at $34.57. This suggests that investors engaged in the tracker/Sirius trade are now actively reversing their positions.
There are also rumors that the recent surge in Sirius XM can be attributed to the rebalancing of the Nasdaq 100 index. Speculation points to the Invesco QQQ Trust (QQQ) potentially buying around 15 million shares of Sirius as they aim to reduce the weighting of their largest components. However, this information has yet to be confirmed.
Taking all these factors into account, it becomes evident that Sirius XM has experienced a massive move. While this may bring joy to those who were long on the stock, it surely wouldn’t have been a pleasant outcome for those who held short positions.