I’ve received a handful of emails this weekend about the sell-off in Clearwire last Friday after a number of comments the management team of Sprint made during a presentation to Wall Street analysts. In the interest of time, I’ll try to do this in a Q&A format. Consider the below Part I.
First, though, know that I bought more shares in Clearwire on Friday. I viewed the drop last week as an opportunity. I also have no interest long or short in Sprint. All of that may represent biases of some sort in my thoughts below.
Second – the noise this week will probably get temporarily louder. Last week’s drop in price will continue to embolden the aggressive/opportunistic shorts, and the current investor base of Clearwire is, shall we say, a bit twitchy. That combo can be volatile. So, if the past few months are any indication, you should expect more rumors to pop up, whether about bankruptcy, delisting, debt for equity swaps, WiMax iPhone 5′s, or whatever else. My advice is to ignore them. The probability of any of them happening anytime soon is too low to take seriously.
That said, the company continues to face an important near-term challenge – the need to find additional funding. Again, Clearwire says it has enough cash to last through June of 2012, and though I am confident the company can raise capital through several different avenues, there are simply no guarantees. After Friday, it is clear Sprint will not be one of those sources of near-term capital, but as I mentioned previously, Clearwire has other (better) options, too.
If I had to summarize my thoughts about last Friday, I’d say three things:
(1) Clearwire’s spectrum is as valuable today as it was the night before Sprint’s conference call. Right now, based on asset value, Clearwire is the cheapest company I have ever seen.
(2) Welcome to the world of momentum shorts and high frequency trading. And there was no doubt a lot of selling on Friday by speculators disappointed that Sprint did not announce a Clearwire buyout or capital injection. But if you can’t distinguish between price and value, Clearwire is going to drive you insane.
(3) There really was no new news on Friday from Sprint about Clearwire for anyone who’d been paying close attention the last few months.
As Clearwire’s CEO pointed out later that day, Sprint remains completely dependent on Clearwire – through the end of 2012 at least. And nothing in my original thesis was contingent on anything other then the terms of the company’s existing relationship with Sprint, which will continue as expected.
Q. What the hell happened on Friday?
A. I’m paraphrasing there. That same question was asked a handful of different ways – including, “Do you think Hesse is angling for a better price on a take-under of Clearwire?” and, “Do you think Sprint is trying to push Clearwire into bankruptcy to buy that spectrum cheaply?”
First, a little context. From Sprint’s perspective, I think it’s safe to say they feel like they created a monster in Clearwire. Sprint gave them spectrum, helped arrange for strategic equity, and sent them wholesale traffic. In the end, Clearwire not only refused to pay Sprint to host their network like Lightsquared did, but somewhere along the way Clearwire realized they held all the cards in terms of launching a wholesale business – and that would directly compete with Sprint’s own network hosting plans.
In short, on Friday, Sprint failed or refused to answer several key questions about Clearwire for uncertain reasons that made the management team appear unprepared, arrogant or evasive. Regardless, the day further underscored that Clearwire’s largest equity owner (and currently sole wholesale customer) would not be providing any new capital, and that the relationship between the management teams was strained. Here are some other summaries from folks who were in attendance at the analyst meeting (one here and another article here).
So there was some superficial sandbagging of Clearwire by Sprint on Friday based on some combo of legitimate gripes and plain old jealousy, but I don’t think it was done because Hesse is angling for a better deal or a take-under. I think he is simply stuck for the time being, frankly, and is biding time while the other sources of uncertainty for Sprint out there become clearer…i.e. T-Mobile, L2 getting through the FCC, CLWR’s raise, etc…while hoping that a better path forward emerges for Sprint afterwards.
In the meantime, Sprint has to move ahead with LTE plans to compete with Verizon and AT&T, and the iPhone is a must for them as well. So while I’m not sure what that all means for the value of Sprint, I do know none of it impacts the value of Clearwire’s spectrum. And let’s not forget that Sprint will be paying $1 billion to Clearwire for wholesale services between now and the end of next year. This is not the act of one company trying to force another into bankruptcy.
So, to greatly simplify, there is still uncertainty about how exactly the value of Clearwire’s spectrum will get unlocked, but in my opinion, the gap between market and intrinsic value is so large and the timeline long enough that Clearwire should soon be able to find some strategic equity…and then sign other wholesale customers, line up some vendor financing and, along the way, further contrast its own fate with that of Sprint.
That won’t happen overnight, obviously, but it was going to take a little time before last Friday, anyway. And if there was an irony in all the chaos of that day, it was that Sprint appears to now have a harder road ahead of it then Clearwire.
Disclaimer: Long CLWR. The above in no way constitutes investment advice. It is for educational and informational purposes only. Nothing contained here should be construed by anyone as an invitation or solicitation to buy or sell any security. It does not contain personalized legal, tax, investment, or financial advice.
Posted by Cale at 1:14 AM in Our Portfolios
My article “A Value Investor’s Case for Clearwire” was posted on the Seeking Alpha website this morning. Below are some more thoughts about recent insider buying at the company by one executive in particular.
My first job in this industry was as an analyst for a small independent research shop just outside Washington, D.C. It was a technical shop that specialized in just one thing: tracking the buys and sells of corporate insiders. The legal, open-market kind, mind you. The theory the founder subscribed to – and that numerous studies confirmed – is that investors could outperform the market by buying the shares of those companies whose executives were also buying shares, ostensibly because those insiders had better insight into the company than investors.
That small little firm made a ton of money by selling expensive annual subscriptions to its research service to just a few dozen institutional investors, most notably some well-known hedge funds and a handful of even more popular mutual fund companies. The founder had developed a proprietary database that tracked every insider buy and sell of the previous 20 years or so, with deep search functionality, share price data and graphing capabilities.
That was not easy to build, considering that when the firm started, they had to pay someone to literally sit in the offices of the SEC to photocopy the physical Form 4s that came in through the mail and were dumped onto a desk every day. But by the time I’d gotten there, thanks to the mother of all insider databases, with just a few MS DOS commands (don’t ask, kids), you could quickly sort out the wheat from the chafe in terms of insider transactions.
If you’ve ever seen The Matrix, I was “Tank” at that job. I sat alone, surrounded by screens of otherwise indecipherable data that poured into via specialized feeds all day long – from 8 in the morning to 10pm, Monday through Friday, and eight to noon on Saturdays. It. Just. Kept. Coming. Long hours spent running queries were occasionally punctuated by moments of pure panic when a significant buy actually happened. Or when Laurence Fishburne called looking for a phone booth.
There are a number of research firms (and now automated services) that parse insider trading data, trying to derive insight on everything from buy/sell ratios to monthly insider volumes. They were all, to us, just bunk. That’s because, statistically speaking, we could prove that the vast majority of insider selling was meaningless. It was noise. There was little correlation between the vast majority of selling in a company’s shares and subsequent stock performance.
Here’s something that most people don’t realize about insider buying, though:
Most insider buying is also meaningless.
The truth is that most insiders are mediocre investors. While a select few are very, very good, many more are awful. And good returns were most often indistinguishable from luck. So while you might think insiders would have an informational advantage, as a group they often seemed to suffer from the same blind spots and/or delusions of grandeur as armchair investors.
Occasionally, an insider would try to game things, simply because they were aware that some schmuck like me was watching those Matrix screens. If he moved the needle enough with a big enough open market purchase, they knew some bleary-eyed analyst would instantly be sent scrambling to, say, get a report up and out to Druckenmiller’s guys before they heard about it first and called in hollering. So, to amend Peter Lynch’s oft-repeated quote about insider buying:
“Insiders might sell their shares for any number of reasons, but they buy them for only one two: they think the price will rise, or because they think they can impress the hedgies.”
Anyway, the reason our little shop did so well was because we were able to tell quicker than everyone else which insider buying was analytically significant. And here’s a hint – out of the thousands of Form 4s that are filed every month with the SEC, only one or two of them mean anything.
All of that was a long-winded way to say this:
There is a relatively small number of corporate insiders that have actually demonstrated real skill at investing in the common stock of their own companies. If you ignored all the meaningless insider buying – and just about everything else, actually – and did nothing more as an investor but buy shares in a company right after one of these guys did, then you would do very, very well.
One of those guys was John Stanton.
Stanton, the current chairman of Clearwire, was nothing short of a legend back then in that little niche of equity research. Without sounding too breathless, Stanton’s track record of insider buys at both VoiceStream and Western Wireless – companies that he personally ran – was phenomenal. To put it simply, at both companies he bought millions of dollars worth of shares at very low prices, then sold both companies for billions of dollars near their peaks.
Here’s his official Clearwire bio:
John Stanton, Executive Chairman of the Board of Directors, has held numerous leadership positions during his career in the wireless industry. He currently serves as chairman of the board of Trilogy Partnerships including Trilogy International Partners, which operates wireless systems in Haiti, Dominican Republic, Bolivia and New Zealand. Stanton served as chairman and CEO of Western Wireless Corporation from 1992 until its acquisition by ALLTEL Corporation in 2005. From 1994 to 2003, Stanton served as chairman and CEO of VoiceStream Wireless Corporation, which was sold to Deutsche Telecom and became T-Mobile USA.
I no longer have access to industrial-strength databases when it comes to Form 4 analysis, but I don’t really need it, either, to give you a glimpse of Stanton’s abilities. Here is a spreadsheet detailing all of Stanton’s insider buying back until 1998, sliced a couple of different ways.
If I were to summarize the highlights, though, it would look like this:
As CEO of Western Wireless, Stanton bought 4.4 million shares on the open market over a seven year period, at an average price of $7.71 per share. He sold the company for $40 per share. So he earned a 420% return on those shares.
As CEO of VoiceStream, Stanton bought (and acquired options) for 2.9 million shares at an average cost of $6.39. He later sold that company for about $122 per share, racking up returns of (you better sit down now) over 1,800%.
Now that VoiceStream data is a bit muddled. Prior to 1998, you cannot easily differentiate between an open market buy versus an option grant on the SEC site. Plus, VoiceStream was bought out by Deutsche Telekom in a cash/stock deal that ended up being structured several different ways, so his shares might have sold for something slightly different, depending on which option he took.
Regardless, even if these estimates of Stanton’s returns in VoiceStream were off by 1,500 percentage points, he’s still in the insider buying Hall of Fame.
To tie this all back into Clearwire, my point is this: I believe that Stanton’s recent insider buying of $5 million worth of Clearwire shares in August is significant, as it has much in common with those previous two home-runs above. Stanton apparently sees a lot of value in Clearwire at recent share prices.
Of course, the fact that a man you’ve never met has bought shares in a particular company is certainly no reason to invest in that company in and of itself. And to clarify, I started buying shares in Clearwire before Stanton’s most significant recent buying there – so his buying was confirmation, rather than a signal.
But I do think it all brings up a very valid question, which is, “What exactly does John Stanton see in Clearwire?”
I think I figured it out. My analysis of Clearwire was published this morning on the Seeking Alpha website. You can read my thoughts in full right here:
“A Value Investor’s Case for Clearwire.”
It gets a little wonky, but please check it out when you get a chance, and let me know if you have any questions.
Otherwise, here’s to pulling for some of that ole Stanton magic, eh?
Disclaimer: Long CLWR. The above in no way constitutes investment advice. It is for educational and informational purposes only. Nothing contained here or on the Seeking Alpha site should be construed by anyone as an invitation or solicitation to buy or sell any security. It does not contain personalized legal, tax, investment, or financial advice.
Posted by Cale at 10:44 PM in Our Portfolios
It may be a bit hard to see, but if you squint, below you can almost make out a bona fide, limited edition, cheesily authentic Islamorada Investment Management T-shirt that showed up recently in Jackson Hole, Wyoming.
Closer up the shirt looks more like this. The front, anyway. On the back is printed what is perhaps the most coveted piece of timeless investing wisdom in the universe – known only to an elite, good-looking few.
My investors are awesome.
Now you may be saying to yourself, “Wait – Jackson Hole? A few weeks ago? Wasn’t that where they held that meeting with all the masters-of-the-economic-universe?”
To which I’d reply, “You know what’s even crazier? This picture was taken by a distinguished balding gentleman. One of those reserved, academic types. With copious facial hair. And whose last name begins with the letter B.”
Yup. Just blew your mind.
In any case, at least my T-shirts got out of the office this summer.
And drop me an email if you’d one day like an IIM T-shirt of your own.
Facebook and the St. Petersburg Paradox http://t.co/nG9Dj3t6 via @WSJ 9 hrs ago
