Market Neutral Investing in the Wireless Industry (by Dave Pinsen)

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Hey Fellow Slopers,

For today’s market neutral trade I shorted CLWR at $5.45 and bought an equivalent amount of WRLS at $6.69. As I’ve done with the last few market neutral trades, I shared the trade idea with subscribers of the Market Neutral Notification List the night before I placed the trade.

A quick note on stops before elaborating on this trade: I mentioned in my previous market neutral trade post that due to the number of positions I am building up to (26 pairs, 52 positions), and the relatively small size of each, if I added stops, they would be wide ones.  I have added wide trailing stops since then. On a few occasions so far, there have been double digit intra-day percentage moves in stocks I've purchased or shorted in previous market neutral trades, e.g., IGTE, a long position, dropped about 20% in one day; CCSC, a short position, spiked over 10% last Friday; and JOE, another short position, spiked over 11% intra-day yesterday. Due to the wide stops I am using, I haven't exited any of those positions. Back to today's trade:

CLWR, a 4G wireless carrier which is 54% owned by Sprint, dropped yesterday on news that Sprint has no plans to buy the rest of the company.

CLWR has been burning cash as it grows subscribers, and currently has an Altman Z"-Score of about -0.75, according to Short Screen (recall that scores below 1.1 indicate financial distress). CLWR has been able to raise additional capital via debt financing recently though, albeit at a fairly high price. CLWR insiders have been net sellers of its stock over the last year.

Wireless networking company Telular Corp. (WRLS) has an Altman Z-Score of about 9.75, according to Short Screen. Recall that Z-Scores above 2.99 indicate financial strength (N.B.: Short Screen calculates a Z-Score for WRLS, and a Z"-Score for CLWR, because it goes by the companies' respective SIC codes: The SEC's website shows a manufacturing SIC code for WRLS and a services SIC code for CLWR, even though both companies are in the wireless communications industry).

Insiders have been net buyers of WRLS over the last year.

WRLS was also mentioned as a GARP (growth at a reasonable price) "strong buy" by Sabrient Systems CEO David Brown in his Seeking Alpha article last week.

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