Stocks to Buy: This Tech Sector "Anomaly" Could Double Your Money By Spring

[Editor's Note: This inside look at an "anomaly" that offers investors one of the best stocks to buy in the tech sector was first published Dec. 17 in Michael A. Robinson's Strategic Tech Investor. To get all of Robinson's research as soon as it's released, click here.]

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I spend a lot of my time looking for "anomalies" in the tech market because they can lead to massive profit opportunities.

And there's one I see right now.

It involves a new market that's worth $970 million - even though it's still in its infancy. Of course, there are a number of players in this market. But it's the two top leaders I want to talk to you about today.

You see, one has lousy fundamentals - with stunning cash losses that continue to mount. The other is cash-rich with a rapidly growing subscriber base.

Yet Wall Street adores the first one (the one with the lousy fundamentals) - and hates the second, which is exactly the opposite of how you would think it should be.

Today, I'm going to tell you all about this exciting new market and why you should consider making a play in it right away.

And then I'm going to tell you which of these top leaders is one of the best stocks to buy now - in fact, you could ride it for a double by Spring.

The "Internet Radio" Wars

The sector I'm talking about is the Internet Radio market.

It's an explosive new market that I follow with great interest not just because of the outstanding investing potential (analysts project sales to grow to $1.31 billion by 2016), but also for purely personal reasons.

You see, I'm a former musician - I'm a guitar player and had my own rock band for a dozen years. I don't play much anymore... but, of course, I'm still a huge music buff.

And I've followed the growth of Internet Radio as well as digital music distribution since the time it dawned in the late 1990s. Indeed, as a former musician I quickly grasped just how big a role this new format would be through online music streaming.

So, you can imagine how excited I was when I first heard about Pandora Media Inc. (NYSE: P). The Web-based service represents some truly great technology...

It's based on something called the Music Genome Project, and the idea here is simple in its elegance - every song ever recorded has very distinct traits that form its "DNA."

The Music Genome software behind Pandora analyzes 400 musical attributes. These cover everything from the type of melody, harmony, and rhythm to musical form, composition, and, of course, lyrics.

With Pandora, you can launch what amounts to your own Internet music channel with just one song or artist. Pandora thinks of this as a "seed" that automatically programs the station for you.

So, you end up hearing lots of your favorites while discovering dozens of new artists along the way.

Now, I admit: I listen to Pandora daily. But as much as I love and use the technology, I can't in good conscience recommend the stock.

By all means, listen to Pandora on your iPad all day long, but when it comes to investing your hard-earned money, Pandora is the Wall Street "darling" you want to run away from as quickly as possible.

The problem with Pandora is simple. The company is growing like a weed - but costs are rising much faster - and the losses continue to mount.

Take a look at its most recent quarter. Pandora's sales grew 50% from the year-ago period to $181.6 million, with mobile ad revenue up 58% to roughly $105 million.

But higher costs across the board resulted in a net loss of $1.7 million! (Compare that to a year-ago profit of $2 million.)

Even worse, for the first nine months of its Fiscal 2014, losses stand at $38 million - a stunning 61% rise from its nine-month losses in the previous fiscal year.

Yet, astoundingly, with Wall Street's help, the stock is up some 250% in 2013.

Since April, six analysts have initiated positive coverage of Pandora. While it's true one analyst recently downgraded it to a hold... two more have upgraded the stock to a buy.

The fact is, if you simply follow the "noise" generated around this company, you'd be convinced it was a no-brainer investment.

But if you ask me, Pandora fits squarely as an example of my Tech Wealth Rule # 2: Separate The Signals From The Noise.

My rule clearly states: If you really want to get wealthy from technology stocks, you need to think for yourself.

And, I believe that based on Pandora's poor financial performance, Wall Street has this one all wrong. Quite simply, the stock has run too far too fast and is poised for a decline.

That's why I think investors would do better to consider the other company in this battle for supremacy in the quickly expanding Internet Radio market.

I'm talking about Sirius XM Holdings Inc. (Nasdaq: SIRI).

What I like best about Sirius is that it is a cash-rich company with good profit margins priced as if it were still a deeply troubled firm.

It all goes back to 2009 when Sirius XM, the product of a satellite radio merger, was on the verge of filing for bankruptcy. The stock traded at just $0.05 a share.

Cable TV mogul John Malone stepped in and gave the firm a $400 million loan. Malone's company, Liberty Media, today owns a controlling interest in what has since become an excellent business.

Indeed, Sirius XM now has one of the nation's best media subscriber bases. It brings in annual sales of nearly $4 billion from 25.6 million paying customers, making it the global leader in audio entertainment.

Let's put that in a broader context.

You see, Sirius now has what amounts to a monopoly on satellite radio. It is brimming with more than 200 channels of content for every conceivable genre of music as well as news, sports, politics, comedy, and talk radio.

And here's the kicker on their low stock price.

The Street has yet to price into the stock Sirius' coveted relationship with the auto industry, which helped the company add 513,000 subscribers last quarter.

Stocks to Buy: Big Auto-Boom Will Push Sirius Shares Higher

With the coming boom in new vehicle sales, there's plenty more where that came from.

Here's what I mean:

Auto analysts note that in November, Americans bought nearly $1 billion worth of new vehicles a day for an annualized 2013 run rate of 16.31 million units, a 7.6% increase over 2012.

Well, roughly 70% of those new cars (about 57 million units) come with Sirius pre-installed in the dashboard.

Logic dictates that if the auto industry continues its recovery, that figure could rise to 100 million units in the next few years - giving Sirius a huge profit boost in the process.

Even without that projected growth, Sirius already has a client base larger than any cable or satellite TV firm - nearly 20% bigger than Comcast, the leading cable company, and 25% bigger than DirectTV, the leader in satellite TV.

In fact, Sirius has more subscribers than the Dish Network, Time Warner Cable, Charter Communications, and Cablevision combined.

Yet, SIRI trades at just $3.50 a share, pennies on the dollar compared with some of those other firms. By contrast, with just half of Sirius' subscriber base, Time Warner Cable Inc. (NYSE: TWC) stock costs $131 share, more than 35 times that of SIRI.

For its part, Pandora is priced seven times higher than Sirius but has a much smaller subscriber base. Pandora says it has 70 million active "users," but J.P. Morgan estimates the actual paid subscriber base at only 3 million.

That makes Sirius 8.5 times bigger than Pandora. With a market cap of $21 billion, Sirius has a 27% operating margin and a 13.5% return on stockholder equity.

To be sure, Sirius has $3.7 billion in debt on its books, much more than I'd like to see. But satellite companies tend to borrow for their capital equipment.

And Sirius generates a lot of cash - more than $600 million in free cash flow last year. It's using some of that money to buy back roughly $2 billion of its stock.

We believe the stock could double by 2016. And it could happen sooner - by spring, even - if the broader market remains healthy and everything we talk about here works out as we say.

That makes SIRI one of those "special situations" we've talked about in the past - and one of the best stocks to buy. Yes, it's a riskier play - but one that is poised to double your money.

The three console makers are in a fight to the death over the global $93 billion videogame market... but you don't have to play videogames to profit from this death match...

About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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