Warren Buffett appears to have insider information, as the billionaire has been actively purchasing a Nasdaq stock with a substantial 4.6% dividend yield, a stock that analysts have recently downgraded.
Warren Buffet, being a value investor at heart, leads Berkshire Hathaway. Value investing entails identifying stocks trading below their inherent worth and purchasing them at a discount. Although the idea seems straightforward, value investing is more complex than it appears as numerous stocks are discounted for justifiable reasons. Investors continue to debate whether a stock is genuinely valuable or if it's a disguised trap.
One of Berkshire's investments, Sirius XM Holdings (SIRI -0.99%), has found itself at the center of this debate. This digital audio company's shares have plummeted nearly 58% this year, and certain Wall Street analysts have downgraded it. Despite Sirius' struggles, Berkshire has constantly bought the stock throughout the year. Could Warren Buffet be privy to information the Wall Street analysts are not?
Challenging circumstances for an underperforming stock
Sirius operates Sirius satellite radio and the music streaming service Pandora. Earlier in the year, the company spun off from Liberty Media, aiming to simplify its corporate structure, and also performed a reverse 1-for-10 stock split to make its shares more appealing to investors. Additionally, the company has launched a fresh strategy that involves expanding its podcast platform by securing exclusive distribution and ad sales rights from big brands such as Call Her Daddy and Smartless.
The new strategy has piqued Buffet's interest, who is drawn to captivating transformation stories. Furthermore, Sirius offers a generous 4.6% dividend yield and is contemplating share repurchases, which enables investors to collect passive income while the company executes a turnaround strategy.
However, Mr. Turnaround Story, Sirius, recently demonstrated that patience is often required for such narratives. The company revealed its strategic plan and updated forecasts for 2025. Sirius expects its 2022 revenue to be around $8.5 billion, which fell short of prior analyst estimates. This would mark a decrease from the projected 2024 revenue and raises concerns given the company's declining subscribers at certain points this year.
In its strategic plan, Sirius revealed its objective to achieve $200 million in run-rate savings by the end of the year and further debt reduction of approximately $700. Management also expressed its commitment to maintaining the company's dividend.
The updated forecast led several analysts to downgrade the company, lowering their price targets due to challenges posed by the disappointing forecast and subscriber trends. Often, companies aiming for a turnaround struggle if they can't demonstrate the potential to increase revenue and earnings as investors question the robustness of the core business.
What does Warren Buffet know?
Berkshire has substantially increased its stake in Sirius this year. It's plausible that Buffet and his team observed the recent guidance from Sirius and sold the stock or diminished its position. I, however, suspect Buffet and Berkshire are investing in Sirius for the long haul. After all, turnaround stories can take several years to materialize.
Buffet has been a long-term investor in other lengthy turnaround stocks with strong dividends such as Kraft Heinz and Citigroup. Sirius's board of directors has also approved a share repurchase program, so they may utilize that tool eventually.
Although I wish to see better subscriber trends, the company has a strategy, generates significant free cash flow, lowers debt, and offers an appealing dividend. Recall, most analysts examine the market within 12 to 18 months, whereas Buffet might be content to hold a stock for years before it bears fruit, so both perspectives could be valid. Several analysts still hold positive sentiments regarding Sirius's long-term prospects.
Currently, the stock trades at approximately 8 times earnings, and I believe long-term investors can afford to grant management additional time to rectify the situation.
In the context of Warren Buffet's investments, Berkshire Hathaway's purchase of Sirius XM Holdings (SIRI) shares, despite its stock plummet and Wall Street downgrades, implies that Buffet believes in the company's potential for transformation. This investment strategy aligns with Buffet's history of investing in turnaround stocks with strong dividends, such as Kraft Heinz and Citigroup.
Considering the complexities of value investing and Sirius's strategic plan to reduce debt and boost revenue, long-term investors may find the stock appealing at its current 8 times earnings multiple, affording management time to correct the situation. These investments in finance and money, through value and turnaround strategies, are crucial components of Berkshire Hathaway's overall financial portfolio.
