Update on My Long CCU Short SIRI Trade

In December of 2004, I proposed going long Clear Channel (CCU) and short Sirius (SIRI) in a paired hedge trade focused on playing off the misconceptions that satellite radio was going to kill broadcast radio.

I wrote an update on that post in January of this year where I said that even though I hadn't made much money on the trade, the fundamentals of the trade still looked good to me and it made no sense to change course.

Here is the basics of the trade I proposed in December 2004:

Buy 15 shares of CCU at $33.92/share costing $500
Short 75 shares of SIRI at $6.90/share raising $500

The net cost of this trade was zero.

The first half of what I thought was going to happen has transpired. Sirius' stock is headed down, and is now trading at $3.73/share. The market has finally woken up to the fact that Sirius' valuation made no sense.

But the second half of what I thought was going to happen has not transpired. The market still hates broadcast radio and CCU's trailing EBITDA multiple has now hit 10x. CCU is trading at $27.83/share.

Nevertheless, my trade is starting to work. I've lost 16% of my money on the CCU long, but made almost 50% on my SIRI short. I am up net $130 on a long $500/short $500 trade. Not sure how to calculate the return on this but I think it's pretty good.

I am going to hold onto this for a while longer. I think SIRI can still go lower. It still has a market cap of $5.2bn on a company that is doing about $600mm in revenues and losing almost a billion dollars a year (not sure how much of that is cash losses).

I also think CCU can go back up when the market recognizes its moves to embrace digital channels such as Internet radio, audio on demand (podcasting), and HD Radio.

So I am hanging onto this one. It's taken longer to work than I thought it would, but its working now and I still like the fundamentals.

Comments

[nick gogerty]

Fred,

in terms of your ROI, you need to calculate the risk capital you would have set aside for this trade. Warning, I am a former Quant/prop trader from a london forex desk and used to Help SwissBank build it Equity options system :)

I would suggest the proper amount would have been to calculate the historical variance of the trade pre-2004 and assume that your risk capital would have been such that going into the trade you had an 20% STDV or annual variance of your Capital at Risk. 5:1 to risk capital based on annualized historic move of the trade.

This gives you the basis for your investment, of course the nice thing is if you have a few other trades at the same time with a low covariance matrix, then you can leverage more and get the higher Return on capital at risk.

The other assumption is that throughout the trade you didn't put more capital in (margin call) while it was going against you or use less risk capital as the trade swung into your favor.

regards,

Nick Gogerty
CEO inclue! & feedgit.com

[howard lindzon]

howard stern will be the only winner at serious. It is $1 at best and than maybe a buyout - INA BULL MKT

The debt will kill them now.

Howard will be sellling his shows on iTunes and is licking his chops for them to go under

[howard lindzon]

howard stern will be the only winner at serious. It is $1 at best and than maybe a buyout - INA BULL MKT

The debt will kill them now.

Howard will be sellling his shows on iTunes and is licking his chops for them to go under

[howard lindzon]

howard stern will be the only winner at serious. It is $1 at best and than maybe a buyout - INA BULL MKT

The debt will kill them now.

Howard will be sellling his shows on iTunes and is licking his chops for them to go under

[JR]

I am curious as to whether you would make your original trade today?