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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


Clearwire Postscript: The Legend of John Stanton

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.