In August 2012, following a roughly 50% plunge in his company’s stock price, Andrew Clark, CEO of Bridgepoint Education, suspended his 10b5-1 trading plan (the company’s CFO also suspended his plan, see filing: 10b5-1 Termination Notice: Bridgepoint). The 10b5-1 program allows for an executive to sell stock on a pre-determined schedule without being accused of acting on insider information. As a side note: The executive can stop the program at his/her own discretion, allowing for a heads I win, tails you lose alignment when it comes to “insider trading.” Mr. Clark began this program in November 2010 and had been selling between 30,000 to 65,000 shares per month.
When Mr. Clark suspended his program in August 2012, it was clearly a signal that he thought Bridgepoint had better days ahead and that the current stock price did not adequately reflect his valuation of the company’s future. At the time, the company had just been denied accreditation by a non-governmental agency, which was vital to its continued future. The company still had the ability to appeal its denial or go to a different agency for approval. All was not lost, but the immediate future looked dire from the stock price’s perspective. Mr. Clark believed in the company enough to suspend his sales and, in essence, buy the stock at the current price.
Fast forward one year, September 2013, Bridgepoint has secured approval from the agency that initially denied it, paving the way for the company’s continued existence. As a result of this approval, the company’s valuation has increased roughly 80% from the troughs following the denial. The Sova Group made the decision to purchase the stock in July/August 2012 based on our analysis that the accreditation approval was likely and if approval wasn’t forthcoming in the near future, the downside risk was minimized by the large cash balance Bridgepoint maintained. The accreditation approval was the clear catalyst we were looking for and once it came, we felt that any further appreciation would be defined by the future performance of the business. We didn’t have as strong as an opinion on the future performance as we did on the company’s ability to get accreditation approval, therefore we sold out our position throughout the beginning of September.
Then this past week, Mr. Clark entered into a Prepaid Variable Forward Sale Contract, which is a
euphemism legal jargon for “Sale of My Stock without Paying Capital Gains Right Now”. I don’t have an opinion on Mr. Clark’s desire to pay taxes right now or later, but I do think it shows two things. First, he is essentially trimming his holdings in the company he is running. Call me nostalgic, but I admire the CEOs of days gone by that accumulated stock in their own companies until they retired or died. This clearly isn’t the case with Mr. Clark. Second, and more importantly, the Prepaid Variable Forward Sales Contract involves a lot of effort on the part of an executive to try to manage his tax liabilities. For my money, I would prefer that executives of companies spend more time running the business in an efficient manner, instead of worrying about their personal tax efficiency. In my mind, if you take care of the investment, the taxes will take care of themselves.
Selling is the hard part for a value investor. Buying when the company is suffering and the pendulum has swung too far in the negative direction offering relatively attractive bargain prices is easy compared to when the company has begun to mend itself and things are looking up. The pendulum can quickly swing back the other direction and behavioral issues encourage an investor to hold on, so as to not miss out on the upside. Bridgepoint’s valuation will most likely rise in the near future, but missing out on those percentage points of return is fine by me. The risk is no longer worth the reward and it is comforting to know that Mr. Clark feels the same way.