Berkshire Hathaway, the holding company led by CEO Warren Buffett, has made a noteworthy move by purchasing a small amount of stock in Sirius XM Holdings. While the exact investor behind this purchase remains unknown, the impact on Sirius XM’s stock price has been substantial. Following the disclosure of Berkshire’s stake, the satellite radio company’s stock (ticker: SIRI) experienced a 9.1% surge to reach $5.34 on Wednesday.
According to Berkshire’s 13-F filing for the third quarter, the company acquired approximately 9.7 million shares of Sirius, which is equivalent to about $50 million. This represents less than 1% of Sirius XM’s overall market value of $20 billion. Considering Berkshire’s massive equity portfolio, valued at around $350 billion, this purchase may seem relatively minor. Nonetheless, the significant jump in stock price could be attributed to several key factors.
One factor that likely contributed to the surge is the limited availability of Sirius shares on the market. Currently, a substantial portion (83%) of the company’s 3.8 billion outstanding shares are controlled by Liberty Media, specifically through its tracking stock called Liberty SiriusXM Holdings (LSXMA).
Another critical consideration is the influence that Buffett’s investment decisions hold over many investors. However, it is highly improbable that Buffett himself was responsible for the purchase of Sirius stock. Instead, indications suggest that investment manager Ted Weschler, one of Berkshire’s portfolio managers alongside Todd Combs, executed this particular transaction. Weschler and Combs manage approximately 10% of Berkshire’s overall portfolio independently from Buffett, who oversees the remaining 90%.
Insiders within the Berkshire community believe that Weschler is also overseeing Berkshire’s substantial 20% stake in Liberty SiriusXM Holdings’ tracking stock. Furthermore, there were reports in 2021 that Weschler, known to have a close relationship with Liberty Media CEO Greg Maffei, arranged a swap of Sirius stock held by Berkshire for Liberty SiriusXM tracking shares.
Although Berkshire has yet to comment on the matter, it is important to note that this new position in Sirius XM is relatively small. Typically, Buffett prefers to make substantial purchases amounting to at least $3 billion for Berkshire. However, this investment provides a remarkable insight into the ever-evolving strategies of Berkshire Hathaway and its investment managers.
A Potential Reason Behind Wednesday’s Rally
Wednesday’s rally in Sirius stock can be attributed to several factors, one of which is the high short-interest ratio compared to other Nasdaq 100 stocks. With approximately 171 million shares being shorted, or almost 30% of the public float, Sirius stands out among its peers.
Short sellers typically borrow and sell shares with the expectation that the stock price will decrease. However, in the case of a highly-shorted stock like Sirius, a rapid increase in price can trigger a phenomenon called a short squeeze. This occurs when short sellers rush to buy back shares to limit their losses, resulting in further upward pressure on the stock price.
The volatility of Sirius stock is well-documented, with previous instances of short squeezes, such as one that occurred during the summer when the stock surged from $5 to about $8 within a few days before subsequently dropping.
Considering the past events, it is possible that Sirius stock may experience a decline in the near future.
Impact on Arbitragers and Investors
The recent jump in Sirius stock has caused financial hardship for arbitragers and other investors who have engaged in a popular trade. This trade involves buying the Liberty Sirius XM tracking stock while simultaneously selling short Sirius. The goal is to profit from a narrowing of the price difference between the two stocks.
However, Liberty Media has proposed a transaction that could eliminate this spread. The proposal entails Sirius distributing its underlying shares to the tracker holders, effectively creating a single stock for the satellite-radio company. This prospect has generated excitement among participants in the trade.
Unfortunately, the spread between Sirius and Liberty SiriusXM has widened on Wednesday, with Sirius now being valued at approximately 40% more than the Liberty tracking stock (according to estimates). Earlier this year, this spread was around 30%. As a result, it may become challenging for a special committee of Sirius directors to approve the proposed combination between Sirius and the tracking stock, which was put forward in September.