Many people like to follow what institutional and hedge funds are buying, selling and shorting. So I began looking over some patent companies that have been making some waves lately. These companies are VirnetX Holding Corp. (VHC), Vringo Inc. (VRNG), ParkerVision Inc. (PRKR), MGT Capital Investments, Inc. (MGT), Wi-Lan Inc. (WILN) and Document Security Systems, Inc. (DSS).
For any new investors out there, short interest is an indicator of what short sellers think about a particular stock. Selling a stock short is a practice of selling securities that are not currently owned, with the intention of buying them back ("covering") at a lower price. Short sellers assume that they will be able to buy the stock back at a lower price than when they first paid for it.
If short interest increases, then shorts are betting that the price of the security will be going down. However, if short interest decreases, then shorts are betting that the price of the security is near the bottom and will likely be going back up. Many investors use short interest to make predictions about the direction of a particular stock and to measure the bullishness or bearishness of it. Below is a table of the short interest increases of the following companies.
*Data from Nasdaq.com
As you can see from the table above, short interest has steadily increased over the last couple of months in these stocks. So why are shorts increasing their positions? There could be many different reasons as to why, so a good question to ask yourself in this situation is what do the shorts know that you don't. Let's take a look at the companies to see what has transpired for the rise in the short interest.
VirnetX Holding Corp.
VirnetX develops software and technology solutions for securing real-time communications over the Internet. VirnetX's software and technology solutions provide a security platform for Internet-based applications, such as instant messaging, Voice over Internet protocol, mobile services and streaming video. VirnetX has a market cap of $1.04 billion with its recent closing price of $20.42, and has over $46 million in cash with no debt.
As of April 15th 2013, VirnetX's short interest climbed to 16.05 million, representing an increase of close to a million shares from 15.1 million at the end of March. The short float now stands close to 38% with the days to cover ratio at 9.20 days.
On April 22, 2013, VirnetX filed a complaint against Microsoft in the United States District Court for the Eastern District of Texas. The complaint includes allegations of willful patent infringement regarding six patents owned by VirnetX, U.S. Patent Nos. 6,502,135, 7,188,180, 7,418,504, 7,490,151, 7,921,211, and 7,987,274.
VirnetX CEO and President, Kendall Larsen said, "Although Microsoft previously signed a patent license with VirnetX, we believe they are infringing our patents in ways that are outside the scope of the original license. We look forward to quickly resolving this matter."
Vringo engages in the innovation, development and monetization of its mobile technologies as well as its intellectual property. Vringo's intellectual property portfolio consists of over 500 patents and patent applications covering telecom infrastructure, internet search, and mobile technologies. Vringo has a market cap of $232 million with its recent closing price of $2.82. Vringo has a book value of $1.81 and has 57 million in cash or $0.69 cash per share.
Vringo's short interest has steadily been increasing since August of 2012. On August 15, 2012, Vringo had short interest of 4.03 million. As of April 15, 2013, Vringo's short interest has climbed to 17.2 million, representing an increase of over 13 million. The short float now stands close to 25%.
On November 6, 2012, the jury unanimously returned a verdict award for Vringo amounting to $30.5 million in respect to past damages by the defendants' infringements commencing from September 15, 2011. It was also confirmed that Vringo would also be compensated by Google (GOOG), with a running royalty rate of 3.5% through 2016. Estimates have royalties in the range of $635 million that Vringo would be receiving. So why have shorts been piling it on Vringo after its win in which Google was found liable for infringing on Vringo's patents?
Three words - post trial motions. This long process by which Google has dragged everything out has been Vringo's silent killer. The uncertainty of what could and will likely take place in post trial motions has shaken many investors out. Because of this, shorts have taken control and have driven down the price of the stock. However, shorts shouldn't feel too confident yet as Microsoft and Vringo are still undergoing settlement discussions. Vringo still has its sights on ZTE with a consolidated trial to be held on October 15, 2013. According to Credit Suisse, Vringo will likely be added to the Russel 2000 in June. And in the fact that Judge Jackson hasn't ruled on the royalty rate yet that Vringo stands to gain from Google, and you have yourself an attractive candidate for a major short squeeze.
ParkerVision engages in the design, development and marketing of proprietary radio frequency (RF) technologies and products for use in semiconductor circuits for wireless communication products in the United States. ParkerVision has a market cap of $331 million with its recent closing price of $3.99, and has over $22 million in cash.
ParkerVision's short interest has steadily been increasing for over a year now. On April 13, 2012, ParkerVision had short interest of 6 million shares. A year later ParkerVision's short interest has climbed to over 18.3 million, representing an increase of over 12 million shares. The short float now stands close to 22% with the days to cover ratio at 14.93 days.
Wi-Lan engages in the acquisition, development and licensing of technology intellectual properties. The company holds and licenses a portfolio of patents that implement a wide range of technologies, including wireless access, wireline access and digital television, as well as patents pertaining to semiconductor, digital storage and antennae technologies. It has approximately 3,000 issued or pending patents, and 260 licensees.
Wi-Lan's short interest has steadily been increasing since the start of the year. On January 15, 2013, Wi-Lan had short interest of 40,000. Three months later, Wi-Lan's short interest has climbed to over 266,000, representing an increase of over 600%. The short float now stands close to 22% with the days to cover ratio at 14.93 days.
MGT Capital Investments, Inc.
MGT engages in the business of monetizing intellectual property. It operates in three segments; Medicsight Software/Devices, Medicsight Services, and MGT Gaming.
MGT's short interest has steadily been increasing since February. On February 15, 2013, MGT had short interest of 28,000. Two months later, MGT's short interest has climbed to 64,000, representing an increase of over 50%. The short float now stands close to 3% with the days to cover ratio at 1 day.
Document Security Systems, Inc.
Document Security Systems engages in the development, manufacturing, marketing and the sale of paper and plastic products to protect information from unauthorized scanning, copying and digital imaging in the United States and throughout the world.
DSS's short interest has been quite the rollercoaster ride the last couple of months. As of April 15, 2013, DSS has short interest of 1.3 million. The short float now stands close to 7% with the days to cover ratio at 13.68 days.
On March 15th 2013, DSS announced that its merger with Lexington Technology Group (LTG) is on pace to close in Spring 2013. By merging these companies together DSS and LGT both stand to benefit strongly from it. DSS provides the companies with an underlying revenue stream, while LTG will look to continue to monetize its intellectual Property with its proven management team.
Because these are speculative stocks with high short interest, investors can be sure to count on lots of volatility and wild price swings. News of any sort can send these stocks sky high or crashing to the ground. Investors are always reminded that before making any investment, you should do your own proper diligence on any stock mentioned in this article. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.