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 moves lately. These companies are VirnetX Holding Corp. (NYSEMKT:VHC), Vringo Inc. (VRNG), and ParkerVision Inc. (NASDAQ:PRKR).
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 and decreases of the following companies.
As you can see from the table above, short interest has been increasing in some patent stocks while decreasing in others. 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 increase as well as the decrease in short interest.
VHC has a market cap currently of $1.23 billion with its closing price of $24.00 as of Wednesday. VHC has over $38 million in cash and no debt. As of May 15th, 2013, VHC had short interest of 15.6 million, representing a decrease of over 400K since April 15, 2013. The short float now stands around 36.41% with the days to cover ratio at 21.2 days. Analysts have an average price target of $50.00 on VHC, which would reflect an increase of over 100% from its closing price of $24.00 on Wednesday.
*Values are in the millions
Even though VHC won a $368 million case against Apple (NASDAQ:AAPL) last year shorts have still been relentless with VHC. However, on the bright side for investors, if VHC receives any positive news with upcoming rulings, shares of VHC will likely be back to its old self again.
While there is no guarantee of a squeeze, it's entirely possible as VHC has already shown investors its squeeze potential in its case against Apple (AAPL). Investors should be warned that not everything goes the plaintiff's way. Just two months ago, VHC lost a case against Cisco (NASDAQ:CSCO) and shares dropped like a rock losing more than 50% over the next couple of days.
Vringo has a market cap currently of $259 million with its closing price of $3.13 as of Wednesday. Vringo has over $49 million in cash and no debt. As of May 15th, 2013, Vringo had short interest of 17.05 million, which represents the lowest that short interest has been over the last month. The short float now stands around 23.42% with the days to cover ratio at 10.15 days. Analysts have an average price target of $6.00 on Vringo, which would reflect an increase of over 95% from its closing price of $3.13 as of Wednesday.
*Values are in the millions
Some of the reasons for the decrease in short interest over the last month or so, is the fact that Vringo stands to gain from several upcoming catalysts in the coming weeks. First, we have the ongoing battle between Vringo and Google (NASDAQ:GOOG) et al. Luckily for investors, post trial motions have finally wrapped up between the two parties as both await Judge Jackson's final ruling. We don't know when it will come, but I fully expect that Judge Jackson will make his decision sometime between now and next week.
Second, the settlement talks between Vringo and Microsoft (NASDAQ:MSFT) are coming to a close. On March 27, 2013, Vringo and Microsoft urged the court to cancel the pretrial conference that was supposed to begin on April 10, 2013 as both parties were discussing settlement. The two companies agreed on a two-month timetable, which means it should all be wrapped up now.
Third, the Russell 2000 will have new additions come June. Companies such as Credit Suisse have speculated that Vringo will likely be added to the Russell 2000. So what does that mean for investors? At the end of this month, the Russell 2000 will reshuffle and evaluate the companies already in the index as well as some of the companies outside the index. When the new Russell 2000 list is announced, fund managers will be obligated to buy the new additions and sell the deletions. Because of this, hundreds of millions of dollars of demand (or selling pressure) will take place. If Vringo is indeed added to the list, its share price will be rewarded handsomely.
Fourth, what seemed like a long ways away is now only a couple of months away, as the trial of Vringo vs. ZTE is set to begin on October 15, 2013. Leading up to trial Vringo and ZTE will have hearings to see what information will or will not be allowed in court. The hearings as well as the trial outcome will have big implications for Vringo because it relies heavily on generating the bulk of its revenue through patent litigation and enforcement.
As you can see, Vringo has several upcoming catalysts coming its way. Because of this, some shorts have already started closing (covering) out positions. However, for the remaining 17 million shorts they could be on the fast track to a major short squeeze.
ParkerVision has a market cap of $392.44 million with its closing price of $4.44 as of Wednesday. ParkerVision also has over $17 million in cash with only 27K in debt. As of May 15th, 2013, ParkerVision had short interest of 18.01 million, compared with 18.3 million on April 15, 2013. The short float now stands around 21.38% with the days to cover ratio at 17.99 days. Analysts have an average price target of $8.70 on ParkerVision, which would reflect an increase of over 90% from its recent closing price of $4.44.
ParkerVision's short interest has been rising for over a year now. On May 15, 2012, ParkerVision had short interest of 7.8 million shares. A year later ParkerVision's short interest has climbed to well over 18 million, representing an increase of over 10 million shares. The short float now stands close to 22% with the days to cover ratio at 14.93 days.
*Values are in the millions
NYSE & NASDAQ Short Interest Total
Looking over a couple of stocks will not tell us the whole story of what is going on in the market. So let's take a look at what is taking place over at the Nasdaq. Based on the information we see that short interest totaled 7.57 billion on May 15, 2013 compared with 7.59 billion back on April 30, 2013 and 7.63 billion on April 15, 2013.
The New York Stock Exchange Group, Inc. (NYSE) based on information received from members and member organizations, had short interest increase to 13.51 billion on May 15, 2013 compared with 13.50 billion on April 30, 2013 and 13.3 billion on April 15, 2013.
* Values are in the billions
Looking over both the Nasdaq and NYSE figures we can see that short interest hasn't swayed much in either direction over the last month or so. However, we can see that there is still an uptrend going in the short interest figures. I was a little surprised to see that there wasn't a big difference considering many investors take the 'sell in May go away' theory to heart. Looking over what is taking place in the market as a whole as well as your individual stocks will give you a better view of what is taking place and to see if there is a correlation taking place.
Because these are speculative stocks with high volume of short interest, investors can be sure to count on lots of volatility and wild price swings. News of any sort can send these stocks flying or sliding. Investors are always reminded that before making any investment, you should do your own proper diligence on any stock mentioned in this article. Have a great day and as always, I look forward to hearing your thoughts or questions that you might have.
Disclaimer: The information I used in this article came from Nasdaq.com, Yahoo! Finance, Scottrade and Finviz.com.
Disclosure: I am long VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.