I asked myself a few days ago, should I buy more Clearwire (CLWR) stock now? I had sold almost all of the Clearwire stock I had bought at $1.04 for $2.40. It was now at $2.30, after Sprint (NYSE:S) CEO Hesse just announced that he was not in any hurry to buy Clearwire anytime soon. That got my attention. Why? Remember, "Be First and be Smart" and "Buying is easy, Selling is hard." With those 2 wise quotes, lets figure out if Clearwire represents a buying opportunity today - and when to sell it.
My formula for buying any stock is easy. 1.) Is the company undervalued? 2.) Is the management world-class? 3.) You have to earn the third one. Seriously, let's focus on the first 2 and the third one will become evident if you do your homework. Then you come up with your own conclusions as to whether Clearwire is a buy at this price point.
Is Clearwire undervalued? Your guess is as good as mine. There is an entire industry built around estimating the price of a stock, and guess what? They are almost always wrong. I started trading at 17 and I quickly learned to take any professional stock estimates lightly. The reason analysts are almost always wrong is that price is not constant. The price at this moment for Clearwire or for that matter any stock can and will change, sometimes drastically. When it comes to Clearwire's price, anything can and will happen in a blink of an eye. Just ask the analyst at DA Davidson who last Tuesday downgraded then upgraded Clearwire from a sell back to a buy all in one hour. Why? Well events that affect the company's price can change the price of that stock negatively or positively in seconds.
I love volatility in a valuable stock. Volatility makes for large profits in the shortest time frame. Long ago I learned that time increases risk. The shorter the time frame, the smaller the risk.
Here is how I buy anything. I learned it from a pawn broker when I was a kid. I call it the Pawn Price. Meaning whatever the price of something is, take 90% off and that is what a pawn broker would give you for any remaining value it has. After many years I have learned that old Pawn Broker knew more about the art of buying and selling then anyone on Wall Street. The Pawn Price gives you an item's true sale price. It works in every industry and country as I have learned. Bankruptcy courts use the term, "dispose of the items at 10 cents on the dollar", so its a legal form of getting a quick fair price on an item if there are no higher bidders. The modified version I created works especially well in the stock market as we shall see.
OK, so lets apply the Pawn Price to Clearwire stock price. I started writing this article last week when Sprint CEO Hesse announced that he had no plans to buy Clearwire. Clearwire instantly dropped from $2.90 to $2.30, which got me interested again in Clearwire. The third rule of my buying anything kept me from buying Clearwire last week as tempting as it was. Then last Thursday Sprint CEO Hesse announced he had bought 30 million shares from Eagle River Holdings to boost Sprint stake in Clearwire to 50.5% and have a majority voting stake in Clearwire. Clearwire immediately dropped to $2.06. Which further confirmed my original interest in buying Clearwire. See, the first investment rule I use re-interested me, the second rule increases the value of my investment and the third rule tells me when to buy and sell. So last Friday, I checked the price of Clearwire and it was at $1.78 or so. What happened? Oh, CEO Son of Softbank (OTCPK:SFTBF) announced he would not rule out making a bid for MetroPCS (PCS). Which means Clearwire is not an outright acquisition at this time, or is it?
Later on Friday Clearwire dipped to $1.75. What now? The Law Firm of Wohl and Fruchter is beginning an investigation into Sprint's recent acquisition of Eagle Rock Holdings voting stock. More volatility for Clearwire, which means more investment profits. Litigation adds to the volatility of a stock, just ask Vringo (VRNG).
Like I said price is not constant. But the third rule will keep you grounded in regards to a stock price when compared to its pawn price. It kept me from buying just yet.
Its now Saturday morning and Clearwire sits at $1.85. Let's check on any news that might give us a clue when to buy. Sprint CEO Hesse declares that, "Any time there's an opportunity at the right price to take out a strategic investor, we will," Why would Hesse need to do that if he has control of Clearwire? Or does he? Up to now everyone on Wall Street thought he had control of Clearwire with a majority stake in Clearwire. Further in the article it states that any future purchases by Sprint of strategic shares would automatically cause those board seats to revert back to Clearwire. This is the kind of info that strengthens my buy or sell order.
No wonder McCaw sold his shares to Sprint. McCaw is playing it both ways to insure that Clearwire either survives with or without Sprint. Sprint just gave McCaw's board seat back to Clearwire while making McCaw more than a hundred million dollars richer in the process and causing Sprint/Softbank new and old investment in Clearwire to lose more than 30% in one day. See Clearwire's original corporate governance rules states that if Sprint buys additional shares in Clearwire above 50% all the board seats it acquires revert back to Clearwire. Which is why Sprint/Softbank have a majority stake in Clearwire, but not operational control of Clearwire. Why is this news important? I don't gamble, I invest. I learned a long time ago to take a position only once I understood its Pawn Price relative to its market price.
Before we go any further, let's forget about price and focus on Clearwire fundamentals to see if its worth the time and effort to invest at any price in the first place. Well, lets look at Clearwire's financials to get a quick overview of its fiscal health. We can see here on Google finance, a summary of all of CLWR financials.
On the surface it doesn't look good, does it? Lets dig a little deeper, because something tells me there's Texas Tea in this cup. How do I know? Easy, my three rules tells me. Let's start acquiring asset data on Clearwire. I quickly got the article below from SA.
Helix Investments wrote this article a few days ago, and posted this beautiful little USA Telco Spectrum Chart below:
Now looking at that little chart above changes everything about Clearwire. Why? Clearwire's entire Spectrum is in BLUE. Meaning its all available for 4G, or 5G or whatever, they want to put on it. Look at all the other telecoms Spectrum holdings. Their entire Spectrum is almost all black, meaning its all tied up in 3G or 2G or whatever other stuff is congesting their network pipes. How valuable is it? I have no earthly idea, BUT, let's figure out a ballpark price. Please keep in mind that this is my method and that no analyst on Wall Street would ever use my method to put a price on a stock. But for me, it gives me a company's real stock price.
OK, lets see what Clearwire's pawn price is, then compare its pawn price to its actual stock price. The only assets of value in Clearwire are its spectrum. Many have tried to put a price on its spectrum, based on previous spectrum purchases, bankruptcy proceedings, asset transfer, etc., wWhich are all good, but like a stock price, asset values can and will change drastically in mere seconds. So I always look for a current price of an asset and it came from Softbank. Follow my reasoning for a minute, then see if my logic makes sense to you. Please remember my pawn price formula just gives me a rough estimate. The pawn price is something I can compare the current stock price without all the hype, drama, emotions, and gibberish that Wall Street peddles into the stock price.
OK, if Son at SoftBank just gave $23 Billion to Sprint, for a 70% stake and majority ownership of Sprint, because Sprint owns 48%, now 50.5% of Clearwire. What? SoftBank gave $23 Billion to Sprint for its 50.5% stake in Clearwire? "Come on, Sinjin, you're nuts," was my first response when I heard the news last week of the Sprint/Softbank merger.
As I stated earlier, the price of Clearwire or any stock can and will change, sometimes drastically in seconds. So I was initially right. Anyways, let's get back to my original proposition; is Clearwire a buy? I asked myself a few days ago why was Softbank's CEO Son buying Sprint? I came to the conclusion to get Clearwire's vast, clean spectrum and access to China through Clearwire.
My reasoning was as follows:
First, Why would Son give $23 Billion to a third place Telco like Sprint? Sprint has and will be unprofitable for a few more quarters. Sprint is a debt ridden company ($21 billion in long-term debt, financing and capital lease obligations, and another $15 Billion commitment to Apple iPhone and least we forget another $10-$15 Billion to build out its infant 4G network), with little usable Spectrum of its own apart from Clearwires vast spectrum(see chart above). Then on Thursday, morning S CEO Hesse confirmed my initial thought that Son, CEO SoftBank wanted Clearwires vast, clean spectrum by announcing he had just acquired enough shares from Eagle River Holdings to make Sprint/Softbank majority shareholder of Clearwire. Remember, Hesse initially caused Clearwire stock to tumble from its upward trajectory when he said he had no immediate plans to acquire Clearwire.
Second, who is Son and what has he done? Well this article gave me a good summary on Son and SoftBank.
I like to keep it simple. So again, I asked myself is Clearwire at $2.10 now Saturday morning its at $1.85 undervalued? Well that Spectrum is worth way more than Clearwire's current $2.7 Billion market cap. How much more is Clearwire spectrum worth? Let's try and figure out a rough estimate using my pawn price formula. Son paid $23 Billion for 70% of Sprint to get just 50.5% of Clearwire. So, add another $23 Billion or so for the other half of Clearwire that Sprint doesn't own minus $2.7 Billion in total debt ($4 Billion in total debt minus the $1.3 Billion in cash). Roughly Clearwire's spectrum, minus its debt is worth a total of $43.3 Billion. Sounds crazy, doesn't it? Son doesn't seem to think so.
Now use my pawn broker price formula. I get a pawn price of $2.96/share without factoring in its debt (10% of $43.3 Billion is $4.33 Billion. $4.33 Billion divided by 1.46 Billion total shares equals $2.96/share). That is only relevant in a fire sale or bankruptcy sale. Clearwire at $1.85 is below its Pawn Price. This is an undervalued stock. Now wait, you must use the third rule before you buy Clearwire or any stock at any price. Remember the Pawn Price only gives you the price a pawn broker or bankruptcy judge would assign to it. So, Clearwire at $1.85/share is way below its Pawn Price.
Now onto part 2. Is the Management at Clearwire world class? Why bother? Remember I don't gamble, I invest. We are first doing our due diligence to see if we should invest in Clearwire stock at this or any price.
Let's find out who really runs Clearwire and if they are world class. World class management creates massive wealth. Look no further than Apple (OTC:APPL). It was near bankruptcy for the second time in its history when Steve Jobs came back to Apple. Jobs recreated Apple into the world class company it is today. Steve created massive wealth for its shareholders, bondholders, suppliers and retailers.
Now back to Clearwires management. Can they create the massive wealth that Steve created for Apple? Only way to know that is to see what they have done in the past.
Craig McCaw founded Clearwire. Here is a McCaw Wiki page. McCaw owns Eagle River Holdings which we learned earlier gave Sprint CEO Hesse the 30 million shares he needed to take control of Clearwire, but not its board. From the billions McCaw has made in companies he has created and sold I would say Mr. McCaw is world class.
Next in our due diligence is the head of Clearwire. His name is John W. Stanton and he is the Chairman of Clearwire. Here is Stanton's Wiki page.
Mr. Stanton's record is as impressive as Mr. McCaw's. I would say Mr. Stanton therefore is also world class. Stanton sold his company to Deutsche Telekom AG for $35 Billion.
Then we have Clearwire's CEO. His name is Erik Prusch. Here is Clearwire's Wiki page which mentions Mr. Prusch.
Let's look at the board of directors and see if anyone stands out. Company Boards can make or break a company when things get ugly. Clearwire needs a world class board to get through this tsunami.
Gerald J. Cardinale stands out. Here is Cardinale's Businessweek profile. Cardinale was a managing partner at Goldman Sachs (NYSE:GS). Cardinale helped McCaw acquire Clearwire's initial investment money. I would say Mr. Cardinale is also world class.
So is Clearwire a good bet at $1.85? That is the $43.3 Billion dollar question.
Let's go back and try to answer some of the questions that arose from reading the articles, news and profiles on Clearwire.
Well, the deal between Sprint and Softbank is my first question. What is it? How does it impact or affect Clearwire price and can it destroy my Clearwire investment? What about W&F law firm investigating Sprint deal with Eagle Rock Holdings? Lets keep it simple.
What is the deal between Sprint and Softbank? Lots of articles here for us to read. What, you thought investing was easy? It is when you are well informed.
After reading all those articles, in a nutshell, the deal between Softbank and Sprint is quite simple on the surface. Softbank takes a 70% control of Sprint and its board and a majority stake of 50.5% in Clearwire, but not control of its board. This is very important as we shall see soon. Softbank assumes all of Sprint and Clearwire's debt and contractual obligations, leases, 4G build outs, etc... I have a hunch that Son really is after Clearwire not only for its spectrum, but for the close working relationship that Clearwire has with China Mobile. See China Mobile, Clearwire and Softbank all share the same spectrum bandwidth and are building the same variant of 4G. My guess is Son also wants China Mobile down the road.
We need to compare Softbank/Sprint management to Clearwire management. Why? Well, we are investing - not gambling - in Clearwire. At the moment Softbank/Sprint management has Clearwire management in a tight spot. Which management team will prevail? I have no idea, but my dad taught me that in a fight the veteran champion usually prevails over a bigger and younger contender. See, dad taught me that age brings wisdom and knowledge.
OK, Are Son and Hesse world class, and are they a match for Clearwire's world class management? Let's find out. Is Son world class? Here is a Son Wiki Page. Anyone that can lose $70 Billion and still be a multi billionaire is world class. Is Hesse world class? Here is Hesse Wiki Page. Hesse is world class.
Now lets sort out the dealings between Softbank and Sprint and their immediate impact on Clearwire.
First, Son gave Hesse $23 Billion for Sprint. Sprint first priority is to get control of Clearwire's vast clean spectrum holdings. How do I know this for sure? Well Hesse first action was to buy McCaw's Clearwire stake, not buy MetroPCS or pay down Sprint's gargantuan debt or buy 4G equipment for Sprints own 4G build out. Actions speak louder than words.
Second, Hesse immediately goes and buys McCaw's stake. Sprint paid Eagle River roughly $2.97 for each Class A share and $13.98 for each Class B share. Keep in mind that those Clearwire shares are now worth $1.85 thanks to Hesse and Son's news releases and actions. As we learned earlier Clearwire's original corporate governance rules (which Sprint helped write back in 2008) requires Sprint to give McCaw's Clearwire voting board seat back to Clearwire. Hesse last year had to reduce Sprint's majority stake in Clearwire.
Why? Above 50% Clearwire becomes a legal entity of Sprint and is thus liable and accountable for all of Clearwire's debt. Clearwire has over $4 billion in long term debt which will greatly impact Sprint and now Softbank's bottom line. Sprint last year had to reduce its majority stake in Clearwire to avoid being Clearwire's legal entity and acquire all of Clearwire's $4 Billion in debt and $7 Billion or so in Clearwire's 4G build out. Will Sprint down the road have to once again lower its stake in Clearwire? Don't know, but its something to keep an eye on.
Third, AT&T (NYSE:T) just filed a complaint with the FCC regarding Softbank (a Japanese company) acquiring such large spectrum from Clearwire. How quickly Sprint forgot it filed a similar complaint when AT&T tried to acquire MetroPCS, which helped kill AT&T's deal with MetroPCS. Fourth, Son issues a statement that he wouldn't rule out going after MetroPCS. Keep in mind that the FCC has made it clear it favors 4 strong major Telecoms.
To recap, Son pays $23 Billion for 50% of Clearwire, without control of its board and gets 70% of Sprint with control of board, but Son gets all of Sprint and Clearwire's debt/financing/capital leases/contractual obligations/4G build outs, which is roughly $60 Billion or more and most of it due in the next 2-3 years. The Japanese Yen will need to triple in price to the dollar within the next 2-3 years or Son will lose another $60 Billion. Sprint/Softbank in less than a week lost 30% of Clearwire's stock price(from $2.90 to $1.85)from Son/Hesse press releases. Sprint/Softbank are now liable for Clearwire's huge debt which will quickly impact both Sprint/Softbanks bottom lines. No wonder Softbank stock has tanked since it announced the Sprint acquisition. Sprint shareholders don't look too pleased at having lost control of its board for a 70% stake in Sprint and acquiring all of Clearwire's debt without a controlling stake in Clearwire's board for only 50.5% of Clearwire. Last Dec. Clearwire management squeezed $1.3 Billion from Sprint. I wonder how much Clearwire's management will squeeze out of Sprint this time around?
Next question that needs to be answered is. How does this Sprint/SoftBank deal affect my Clearwire investment? On the surface you only need to look at its current price of $1.85. Does Hesse's acquiring a majority stake in Clearwire make it a good buy. Well, Clearwire once again now has both Sprint and Softbank obligated to its debts and 4G build out costs while still retaining its independence. Sprint /Softbank will now fund it and make sure its 4G network is fully up and running by next year. AT&T and Verizon (NYSE:V) clearly see Clearwire's spectrum value.
What about the legal investigation? That will take more than a year if it ever goes anywhere. Just keep an eye on any litigation news that pops up.
With Clearwire's board free to do what it wants, is there a possibility of a large hostile bid for the remaining 49.5% of Clearwire? I have no idea. McCaw, Stanton and Cardinale have the experience, might and muscle to do it with other large stockholders and bondholders if they see an opportunity or it makes sense. I like that Stanton has a large stake in Clearwire.
Next week Clearwire announces their third quarter financials. Clearwire will announce more profits, less debt, etc.. How do I know? FreedomPop and other MVO have been giving revenue to Clearwire this past quarter for using Clearwire's vast spectrum holdings, and Clearwire recently announced they were reducing their 4G roll-out to save money.
So is Clearwire a buy? You decide for yourself. But don't buy until you understand all three of my rules. Remember, price is not constant.
When to sell? That's easy, whenever you have a profit! Remember to use stops to get you out if things change.
Disclosure: I am long CLWR, S. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.