By Sinéad Carew
(Reuters) – Shares of Sirius XM Holdings fell 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 rebalancing in the Nasdaq 100.
U.S. satellite and online radio company Sirius XM, majority-owned by Liberty Media, last traded at $6.99 after closing 42% higher at $7.81 on Thursday for its biggest one-day percentage gain since March 2009.
Analyst firm Ortex estimates that 34% of publicly available Sirius 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 pay off the debt and pocket the difference.
A short squeeze occurs when these investors are forced to quickly hedge their bets to limit losses if a stock gains ground instead of falling.
According to Morningstar analyst Neil Macker, short-sellers allegedly attempted a messy transaction to make money from Liberty Media’s restatement of follow-up actions related to its split from the Atlanta Braves into a separate action.
Macker said the Sirius XM tracking stock has traditionally traded at a discount of around 30% to the net asset value of the underlying stock and that the short sale “was based on the belief that reformulation would help close that gap.”
“However, the large number of shares held short along with a relatively small free float provided fertile ground for a short squeeze as seen on July 20,” wrote Macker who estimates a fair value of $7.50 for the stock.
Evercore analyst Vijay Jayant said the upcoming rebalancing of the Nasdaq 100, of which Sirius is a member, was also a factor for the short squeeze as well as associated options trading. Rebalancing takes place after Friday’s closing bell.
Additionally, with Sirius XM’s available free float limited by Liberty’s 83% and exchange-traded funds (ETFs) 5% ownership, Jayant said he doesn’t believe the stock’s volatility was due to a fundamental change in the business.
“We would say Sirius XM’s valuation was already stretched given the company’s growth outlook on July 19,” said Jayant, who lowered his rating for the stock to “underperform” from “online.”
Seaport Research Partners analyst David Joyce downgraded the stock from “sell” to “neutral” and set a price target of $4.50.
Joyce slightly increased his estimate of self-paid net subscribers for the year and said he supported Sirius’s moves to “update systems, customer experience and long-term satellite capacity.”
But he said that didn’t support the “wild move” in stocks.
(Reporting by Sinéad Carew, Medha Singh and Lance Tupper; Editing by Sharon Singleton)