Investigating The May Sell-Off In Clearwire: Who Or What Is Responsible?

| About: Sprint Corporation (S)
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Of all the companies we cover, none provides as much drama as Clearwire (CLWR). The wireless company is constantly in the news for some sort of reason, and the attention it receives in the press often manifests itself in the company's stock price. In the past 2 weeks or so, however, there has been a dearth of news about Clearwire, either from the company, or the press. And yet, the stock has steadily dropped since the start of May, falling almost 22%, compared to a drop of just over 5% from the S&P 500 (NYSEARCA:SPY). What we find more noteworthy about this drop is that it did not occur during one day, on the back of some headline or rumor. Rather, it has occurred gradually, with the stock reaching a new 52-week low of $1.06 on Wednesday, May 16, before recovering to close at $1.14.

Our last article on Clearwire was on April 30, in which we argued that worries about the company's spectrum positioning were overblown. Verizon's (NYSE:VZ) spectrum deal with a consortium of cable companies was (and still is) being reviewed by the FCC and Justice Department, and the 700 MHz spectrum sale that triggered a drop of as much as 20% in Clearwire's stock is contingent upon approval from the FCC. With that serving as a backdrop, we now begin to see if we can unearth any reasons for the selloff that Clearwire has seen this month.

Spectrum Developments

From what we have seen, there have been no developments in the spectrum market that would be threatening to Clearwire. The FCC is pressuring Verizon regarding its proposed 700 MHz spectrum sale. The agency wants to know why Verizon chose to unload this spectrum now, having done nothing with it since acquiring it at auction in 2008, and what steps Verizon had previously taken, if any, to sell the spectrum, and what its plans for this spectrum are if the government blocks the company's spectrum deal with the cable companies, to which this 700 MHz deal is tied.

Separately, AT&T (NYSE:T) and U.S. Cellular (NYSE:USM) announced a spectrum deal with Cox. AT&T will be buying 8 700 MHz B Block licenses, covering areas on the east coast, including Florida and Virginia. U.S. Cellular is buying 4 licenses covering Kansas, which the company says it will use to develop its LTE coverage in the state. While financial terms of this deal were not disclosed, it is known that Cox paid $28 million for this spectrum at auction, so even if the company managed to score a triple on its investment, the sale would amount to just $84 million.

Insider Selling & Stock Sales

With the fall the stock has seen in May alone, one would assume that either Clearwire executives were cashing out by the millions, or the company was flooding the market with piles of new shares. So is this what has been going on? As with everything else surrounding Clearwire, the truth is not black and white, but rather a shade of gray.

Since the beginning of May, just one company executive has made a sale (or any kind of transaction for that matter). John Saw, Clearwire's Chief Technology Officer, sold 10,213 shares on May 14. He still holds 790,721 shares of Clearwire, per the Form 4 filing detailing his sale. Other than that, there have been no insider transactions since March.

So is the company then flooding the market with shares? Perhaps. On May 4, Clearwire filed a Form 424B5 with the SEC, detailing a possible stock offering with Cantor Fitzgerald of up to $300 million. However, both the wording of the filing, as well as the stock chart throughout May imply that this is not what has been causing the selloff. Usually when a company announces a stock offering, the share price falls one day to account for the dilution, and then the stock begins to trade "normally" again. While Clearwire did fall sharply after the SEC filing was posted, it kept falling, implying that the filing, on its own, is not the reason for the fall. In addition, the wording of the filing does not guarantee that a stock sale will occur. Clearwire states that, "we have entered into a controlled equity offering sales agreement, dated May 4, 2012, which we refer to as the sales agreement, with Cantor Fitzgerald & Co., which we refer to as CF&Co, relating to the shares of our Class A Common Stock, par value $0.0001 per share, which we refer to as the Class A Common Stock, offered by this prospectus supplement. Pursuant to the terms of the sales agreement, we may offer and sell shares of our Class A Common Stock having an aggregate offering price of up to $300,000,000 from time to time through CF&Co, as our sales agent under the sales agreement. Sales of shares of our Class A Common Stock, if any, pursuant to this prospectus supplement and the accompanying prospectus may be made in privately negotiated transactions or by any method permitted by law..." The wording here implies that Clearwire is not certain that an offering will take place, and that if it does, it may occur in small increments, and not all at once.

The Dichotomy of LightSquared

An article at StreetInsider, posted on May 14, caught our attention, due to the inconsistencies it brings up in how investors treat Clearwire. For some, it seems that the company can do nothing right. In essence, the article implies that investors are worried about Clearwire's ability to maintain as a going concern status, "especially in light of news that another cash-strapped wireless venture LightSquared is on the verge of bankruptcy."

To us, that statement is absurd, and casts Clearwire in an unfair light. For months, the market fretted over LightSquared, seen as a nimble upstart that would supplant Clearwire in the wireless wholesale market. Well, that has not happened. Instead, LightSquared is in bankruptcy, having been blocked from ever launching its network by the federal government. And the company's partners, which include Best Buy and CSpire, are likely to look for other wholesale wireless companies able to meet their needs. Enter Clearwire, the only other wholesale wireless company in the United States. Investors cannot have it both ways. They cannot worry about the competitive threat LightSquared poses and then fret over LightSquared filing for bankruptcy because it was unable to compete.

Frankly speaking, the issues we cite above provide no logical answers for why Clearwire has sold off in May. And it is likely that there isn't a logical answer. Markets often behave in strange ways, sending stocks soaring or falling for no particular reason. We see no individual catalyst that could have sparked this selloff. The spectrum sales seen in May were small in nature and confined to specific geographies. Verizon's spectrum sale is at a standstill, as the company is mired in government investigations. There has been only one insider sale at Clearwire, and the company's stock offering, based on the wording of its SEC filing, is not definitive. And LightSquared, Clearwire's primary competitor, has filed for bankruptcy. With there being no clear answer to Clearwire's selloff, we will now try to see where Clearwire is going.

Whale Watching

Admittedly, analyzing 13-F filings of "smart money" investors only yields insights into what was going on in the first quarter of 2012, since 13-F filings have a lag time of 6 weeks. This week featured a number of 13-F filings from the world's best known investors, and Clearwire found a place in many. While these filings reveal what large investors did in the first quarter, not in May, they may offer clues to where they see Clearwire going in the weeks and months ahead.

On balance, institutional flows were bullish for Clearwire. In the first quarter of 2012, more than 66.7 million shares were added to the long portfolios of "smart money" investors, (a jump of 20.73%) and we identify the 10 largest buys and sells among institutional investors

Clearwire Fund Flows, Q1 2012
Firm or Fund Transaction Transaction Size (# of Shares) Old Stake New Stake
Alden Global Capital Liquidation -10,905,000 10,905,000 0
Adage Capital Partners Liquidation -8,695,141 8,695,141 0
Fidelity Sale -4,155,104 51,252,760 47,097,656
Citadel Sale -3,484,620 8,887,322 5,402,702
Aletheia Sale -3,422,551 12,326,392 8,903,841
New Jersey Pension Fund Sale -3,300,000 4,102,816 802,816
TIAA-CREF Sale -2,595,970 3,350,652 754,682
Norges Bank Liquidation -2,338,888 2,338,888 0
Citigroup Sale -2,203,669 3,353,381 1,149,712
Deutsche Bank Liquidation -1,952,850 1,952,850 0
Highside Capital Management Purchase +3,060,800 19,342,700 22,403,500
BlackRock Purchase +3,303,801 4,059,778 7,363,579
Raging Capital Management Initiation +3,754,300 0 3,754,300
Shannon River Fund Management Initiation +5,000,000 0 5,000,000
Wellington Management Initiation +5,109,065 0 5,109,065
THS Partners Purchase +5,188,680 852,768 6,041,448
Sirios Capital Management Purchase +6,314,353 5,676,371 11,990,724
Highbridge Capital Management Purchase +7,002,000 735,450 7,737,450
Chesapeake Partners Purchase +17,558,357 10,709,702 28,268,059
Mount Kellet Capital Management Purchase +21,124,000 23,260,400 44,384,400
Net Shares +34,361,563 171,802,371 206,163,934

Within the 10 largest buys and sells, 4 funds liquidated their entire stakes in the first quarter, while 3 funds opened up stakes. Several funds more than doubled their existing stakes, such as Highbridge and THS Partners. And Mount Kellep Capital Management dramatically increased its stake, and has positioned itself to be Clearwire's 2nd largest outside shareholder, behind Fidelity [we exclude Sprint (NYSE:S) and Intel (NASDAQ:INTC) as outside shareholders]. For investors who put their faith in tracking institutional flows, the data shows that the "smart money" was bullish on Clearwire in the first quarter. However, long investors in Clearwire are not the only ones that have been making moves in the stock.

Funds are not required to disclose short positions in their 13-F filings, so knowing exactly who is shorting Clearwire is not possible. It is possible, however, to see overall short data, which is provided by the NASDAQ. According to the exchange's data, short interest in Clearwire reached a 5-month high as of April 30, with 44,231,502 shares sold short. And it is possible that during May, short interest in the stock increased, which may be a reason why the stock has continued to fall. However, the current short interest in the stock is nowhere near a record level, which was reached in November, amid fears of a default. On November 30, short interest peaked at over 53 million shares, before proceeding to fall to under 32 million shares at the end of January 2012.

Conference Developments

On the morning of Wednesday, May 16, Clearwire's CEO, Erik Prusch spoke at JPMorgan's Technology, Media, and Telecom Conference, alongside many other telecom CEOs. Given that the stock closed down over 4%, and was down as much as 10.9% during the day, Prusch must have said something to frighten investors. After looking into the issue, we feel that blame should be assigned to Sprint CEO Dan Hesse for the day's fall, and not Prusch. On a call with analysts, Hesse said that for Sprint, now is not the time to be considering mergers, given that its shares are trading at depressed prices. Given that many Clearwire investors wish to see Sprint bite the bullet and take over the company, this statement from Sprint's CEO likely did little to inspire confidence. Still, Hesse left the door open a bit, saying that he would consider a takeover or merger if the timing was right, because "sometimes something might happen where you might see synergies decrease substantially if you didn't move."

As for Clearwire CEO Prusch himself, he spoke about the company's upcoming LTE network. Prusch argued that carriers need Clearwire's LTE network, saying "[operators] need to find solutions, and I don't think mergers and acquisitions are the way to find solutions...key point for them is to get access to gigs at an inexpensive price, at least a comparatively inexpensive price."

Prusch was also asked if Clearwire can sign deals with other large wireless companies besides Sprint and Leap Wireless (LEAP). Prusch said that 2013 will be a "year of opportunity" in terms of adding new wholesale customers, and that the company is "not precluding anybody at this point in time", including AT&T or Verizon, even though they are competitors of Sprint, although Prusch himself did not mention any companies by name.


Frankly speaking, there is no clear reason for why Clearwire has sold off in May so continuously, with little in the way of direct material news from the company. It is important to remember that stocks often move without any news for long periods of time, and that can be frustrating. For long-term investors in Clearwire, or any company for that matter, periods like these should be used to re-evaluate the thesis that underlined your original investment. Has anything fundamentally changed to alter your thesis? In our opinion, there have been no developments in May to alter our stance that, in the long-term, an investment in Clearwire will be a profitable one. We have been using the stock's weakness this month to add to our position. That being said, investors must ask themselves how long they are willing to wait. With a stock like Clearwire, the potential profits will not be realized for at least several years. While we may be prepared to wait that long, there are investors that are not, and that is perfectly understandable. On balance we believe that investors not currently in Clearwire who are willing to wait for the stock to pay off would be wise to take advantage of current weakness, existing investors should take this time to re-evaluate their holdings, and ask themselves if they are willing to wait the necessary amount of time it will take for Clearwire to become a profitable business.

Disclosure: I am long CLWR, T, VZ, INTC.

Additional disclosure: We are long shares of T, VZ, and INTC via the SPDR Dow Jones Industrial Average.