Charts are Signaling 45% Upside in This Under $3 Stock
When I bought a new vehicle last year, it arrived with a free six-month trial to Sirius XM Radio (Nasdaq: SIRI), the commercial-free satellite radio provider. I was skeptical, but took advantage of the trial — after all, it wasn’t costing me anything. But with dozens of free, local radio channels at my fingertips, I couldn’t imagine why I’d pay for it.#-ad_banner-#
Fast forward one year and I admit I’m hooked. Sirius has become a part of my driving routine. Most of the time, the channel is parked on classical music, although I occasionally switch to commercial-free talk shows. Now, I find it hard to imagine going back to commercial radio!
It seems I’m not the only one. Sirius has developed a loyal following. The world’s largest radio broadcaster, by revenue, currently has 22.9 million subscribers. And this number is regularly increasing.
For the third time this year, the company raised its full-year guidance on net subscribers. Management now expects to add about 1.8 million new subscribers by year-end, up from previous estimates of 1.6 million.
Since many new cars come with a Sirius trial subscription, much of the company’s growth is driven by robust North American auto sales. An August Scotiabank Economics report showed double-digit gains in North American car sales so far this year — the highest level since 2007. Similar increases are expected in the second half of 2012, due to record low interest rates.
Sirius isn’t just found in people’s cars, however. Commercial-free radio programming has found its place in the home, the office, and in businesses, like restaurants and hair salons. In fact, Sirius is the second-largest subscription-based entertainment provider in the United States behind only Internet movie provider Netflix (Nasdaq: NFLX). And, according to many industry analysts, Sirius should be able to double its user base in the coming years.
By April 2011, the stock hit a multi-year high at $2.44; however, unable to maintain this level, Sirius fell to a low of $1.27 before again gaining ground. The stock tested resistance near $2.40 in March 2012. But, yet again, it could not penetrate this level, and fell.
Hitting a low of $1.78, the stock clung to support for several weeks, marked by the intersection of the major uptrend line. Gradually rising off this low, shares jumped in June 2012, and have not looked back. An accelerated uptrend line has since formed.
In late July, the stock moved over 10% in a week on higher-than-normal volume. In the process, the shares finally managed to break $2.44 resistance. For several weeks throughout August and much of September, the shares plateaued just above this former resistance level, which now marks support.
However, since mid-September, the stock has again been moving higher. This Oct. 8 trading week, Sirius hit a new multi-year high at $2.79. The next major resistance is near $4, a resistance level dating back to 2006-2007. From current prices, that would represent a 46% gain.
This bullish technical outlook is supported by strong fundamentals. For the upcoming third quarter, to be reported Oct. 30, analysts’ project revenue for the period will increase 12.6%, to $858.6 million, from $762.6 million in the comparable year-ago quarter.
With almost 1.5 million net subscribers already added in 2012, and continuing growth in auto sales, analysts expect Sirius’ full-year 2012 revenue to increase 13.3% to $3.4 billion, from $3 billion last year.
Although analysts’ project upcoming third-quarter earnings will stay flat, at $0.02 per share, full-year 2012 earnings are expected to rise a whopping 686% to $0.55, compared with 7 cents per share last year. At current levels, that means SIRI is trading at less than 5 times next year’s projected earnings.
Given the company’s strong technical and fundamental growth outlook, I plan to go long on the satellite radio provider.
Risks to consider: Much of the company’s projected growth is based on strong sales in the auto industry. If new car sales fall, so would the company’s growth prospects. However, because Sirius is also making its way into the home and business market, the stock should continue to maintain strength.
Action to Take –> Buy SIRI at the market price. Set stop-loss at $2.33, slightly below important support. Set target at $3.99 for a potential 45% gain by late 2013. Risk/reward ratio: 3-to-1.
This article originally appeared on TradingAuthority.com: