Will Sirius XM Radio Be Hurt by GM's Bankruptcy?
General Motors (GMGMQ) filed for bankruptcy June 1, creating the potential for a massive restructuring of the auto giant's relationships with its employees, dealers, and suppliers. Satellite broadcaster Sirius XM Radio (SIRI) is highly dependent on GM and other carmakers for new subscribers, so is it in big trouble now, too?
Maybe not. Tyler Savery, a writer on the SiriusBuzz.com blog, says the bankruptcy could actually give Sirius XM shares a small boost this year. Fears about excessive debt and declining numbers of subscribers prompted an 86% drop in the stock over the past year. Savery expects a pop in the price because, he says, the bankruptcy will likely prompt a wave of heavily discounted auto sales, and many such sales will bring new subscribers. (Savery discloses on all his posts that he owns Sirius XM shares.) Other investors seem to agree—the shares gained 13% on May 29, three days before GM's bankruptcy filing.
Check Out AOL and Other Recent Spin-offs
Conventional wisdom says money can be made buying stocks just added to a major index. On June 1 came news that Cisco Systems (CSCO) and Travelers (TRV) will replace General Motors (GMGMQ) and Citigroup (C) in the Dow Jones industrial average. Time to buy?
A study by Messod Daniel Beneish of Indiana University's Kelley School of Business and John Gardner of King's College London found no salutary impact on stocks that entered the Dow—just those added to the Standard & Poor's 500-stock index. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).) The difference comes down to the buying power of index funds, which have about 50 times more money in the S&P 500 than in the Dow.
Scooping Up Spin-Offs
Time Warner (TWX) announced on May 28 it would finally undo one of the worst-performing mergers of all-time by spinning off its AOL division. AOL was no bargain in 2000 but may be worth a look now. Voluminous academic research has concluded that corporate castoffs often outperform the market over the three years after they're cut loose. But investors must scrutinize the spin-off terms to ensure the freed unit isn't saddled with excessive debt or other liabilities.
It's too soon to analyze the AOL deal, but William Mitchell, editor of newsletter Spinoff & Reorg Profiles, likes some other deals. Potlatch (PCH) spun off Clearwater Paper (CLW), its pulp mill operations, in December. The unit has no debt and won an IRS ruling to qualify for a lucrative alternative energy tax credit. If the ruling stands, Clearwater is trading for less than two times what it's likely to earn this year, he says. In May, Hutchison Telecommunications International (HTX) spun off its Hong Kong and Macau operations as Hutchison Telecommunications Hong Kong Holdings (HTHKY). Shares trade for roughly the company's tangible book value, even though the profitable unit has had rapid earnings growth for several years.