Sirius XM shares pull back after 'wild' gains with short squeeze in focus

investing.com:

By Sinéad Carew

(Reuters) — Shares in Sirius XM Holdings (NASDAQ:SIRI) were down 10.5% on Friday, erasing some of their dramatic gains in the previous day's session with analysts attributing the volatility to a short squeeze, as well as a rebalance of the Nasdaq 100.

U.S. satellite and online radio company, Sirius XM, which is majority owned by Liberty Media, last traded at $6.99 after closing up 42% at $7.81 on Thursday for its biggest one-day percentage gain since March 2009.

Analytics firm Ortex estimates that 34% of Sirius's publicly available shares are sold short, where bearish investors borrow shares to sell them «short» with the aim of buying them back at a lower price to repay the debt and pocket the difference.

A short squeeze is when these investors are forced to quickly cover their bets to limit losses if a stock gains ground instead of falling.

Short sellers were reportedly attempting a complicated trade to make money off the reformulation of Liberty Media's tracking stocks, related to its spin off of the Atlanta Braves into a separate stock, according to Morningstar analyst Neil Macker.

Macker said Sirius XM tracking stock has traditionally traded at a discount of around 30% to the net asset value of the underlying shares and that short selling «was based on the belief that the reformulation would help to close that gap.»

«However, the large number of shares held short along with a relatively small float provided fertile ground for a short squeeze as seen on July 20,» wrote Macker who estimates a $7.50 fair value for the stock.

Evercore analyst Vijay Jayant said the upcoming rebalance of the Nasdaq 100, of which Sirius is a member, was also a factor for the short squeeze as well as related options