Don't Let Amazon Sirius Up Your Portfolio

NEW YORK (TheStreet) -- Sirius XM Radio(SIRI) is a great product. People love the product the company offers so much they are willing pay a fee each month to listen to it over free ad-based radio. Much in the same way bookstores are able to sell books and CDs when a library may have a location just as near.

If you have a product people want badly enough, they will pay for it even with an alternative is free.

In the stock market though, purchasing simply because you like the product is the wrong way to go.

"Oh, but the stock is so cheap, it's only $2 a share and it's a great product, so the stock price must go higher." That sums up some investors' decision-making process. Using a simplistic approach more often than not ends with losses and heartbreak.

Given the number of people that own shares of Sirius, the stock can't help but trade at inflated prices. As long as the shareholders don't sell, the price will remain. Fortunately for shareholders, the odds of a mass exit are small. Unfortunately, big moves higher are equally unlikely due to the overall size of the company and the current rich valuation.

It's not the wisdom of capital allocation supporting the share price of Sirius. Rather it's pure emotion, premised on "I will hold on and see what happens." The mob works in interesting, albeit predictable ways.

For over a year now I have written that the best way to profit from Sirius is through selling calls because the odds do not favor a move higher beyond time decay. Perhaps a buyout may do the trick, but even then maybe not.

The forward price-to-earnings ratio is over 20, and on May 13, 2011, Sirius shares closed at $2.24. Clearly Sirius is moving sideways as the 200-day moving average flat lines. No dividend and no movement for investors (traders are having a good time though). Watching Sirius during the last year must be near the excitement of watching the grass grow.

Amazon.com(AMZN) investors are well advised to take a look at Sirus to gain a greater understanding of the upside potential for the large online seller.