According to the latest short interest numbers, short interest in Vringo (VRNG) sits over 17 million. Looking back at this time last year, short interest is up roughly five fold. Today I would like to talk about some of the reasons why short interest is up and why I wouldn't want to be shorting Vringo at these levels right now.
To the new investors in Vringo you should know that Vringo had two secondary offerings last year, which boosted its total shares outstanding. This made a couple of things happen.
First, Vringo was able to use the $30 million it raised from the first of two offerings to enter into a Patent Purchase Agreement with Nokia (NOK). Vringo purchased the portfolio for $22 million, which consisted of more than 500 patents and patent applications worldwide, and agreed to pay Nokia a 35% royalty once revenue from the use of its patents equals the $22 million purchase price. Both parties stand to benefit from the agreement as Vringo acquires over 500 patents at a discounted price and Nokia is able reduce its debt by selling assets as well as collecting a 35% royalty rate.
This is something similar to what Vringo has done with Microsoft as both parties have recently settled out of court. Microsoft agreed to pay Vringo $1 million upfront, as well as transferring six of its patents and paying 5% of whatever amount Google ends up paying to Vringo in a separate suit, up to a certain cap. However, in my opinion, the Microsoft settlement is a non-issue right now since the biggest highlight from the settlement was the six patents that Vringo received from Microsoft. Right now investors do not know what those patents are, what Vringo wants to do with them and how much they are or could potentially be worth.
Second, the two secondary offerings made it possible for millions of more shares to be shorted. Over 20 million shares were added to the float from the two offerings. Shorts were not able to short as many shares in the past because the float was much smaller than it is today. That's one of the big reasons why the short interest has been trending higher over the last year or so. That, as well as the fact that post-trial motions between Vringo and Google have dragged on longer than expected.
Third, the market cap of Vringo has dramatically increased since last year. This was caused by a spike in share prices as well as the addition of the 20 million shares added by the secondary offerings. Because of the increase in market capitalization, Vringo was approved to become a member of the Nasdaq. This was a big stepping-stone for Vringo as it helped solidify itself as a reputable company and opens it up to more institutional shareholders etc. Andrew Perlman, Chief Executive Officer of Vringo said, "We believe that Nasdaq offers an exciting platform for our growing company. We feel that Nasdaq's international presence aligns with our intention to create, acquire and monetize intellectual property on a global scale."
The Russell 2000
A lot of talk has been going about whether Vringo will make the Russell 2000 this year. So what exactly is the Russell 2000 and what are the qualifications?
Russell rebalances its indexes every year in June to reflect the changing markets and to maintain true representation of those markets, capitalization and style.
The Russell 2000 is a widely followed benchmark of small-cap stocks because it tracks the 2,000 smallest companies in the market. It's an important barometer of the American economy because it measures the performance of smaller companies and businesses. The median market cap of a Russell 2000 component is less than $500 million. The table below shows the results based off of the total market capitalizations of companies in the index as of last year.
*Values are in the millions
Most investors forget that Vringo was actualy added to the Russell Microcap Index last year. Clifford J. Weinstein, Executive Vice President of Vringo said, "We are pleased to be integrated into the Russell Indexes. This accomplishment is an important milestone in the continued execution of our corporate strategy."
So when does the rebalancing take place? On the last trading day in May, all eligible securities are ranked by their total market capitalization. Companies whose stocks are listed on eligible stock exchanges in eligible countries and that pass minimum liquidity and other tests are considered for inclusion in the indexes.
- June 14: Preliminary additions and deletions to the Russell Global, Russell 3000 and Russell Microcap Indexes are published.
- June 21: Updates to the list of additions and deletions.
- June 28: Reconstitution final after the close of the U.S. markets.
- July 1: Final membership lists are posted for the Russell Global, Russell 1000, Russell 2000, Russell 3000, Russell Midcap and Russell Microcap Indexes.
Determining Index Membership
- Ranking the U.S. common stocks from largest to smallest market capitalization at each annual reconstitution period (May 31).
- Top 3,000 stocks become the Russell 3000 Index.
- Largest 1,000 stocks become the Russell 1000 Index.
- Next 2,000 stocks become the Russell 2000 Index.
- The smallest 1,000 in the Russell 2000 Index plus the next smallest 1,000 comprise the Russell Microcap Index.
- Pink sheet stocks.
- REITs and PTPs.
- Stocks trading below $1.00.
- Closed-end mutual funds, limited partnerships etc.
- Foreign Stocks and American Depositary Receipts (ADRs).
- Stocks with a market capitalization of under $30 million.
Leading up to the Russell 2012 evaluation period, Vringo's market cap did not meet the standards of the Russell 2000. However, this year with a market cap of over 250 million, Vringo has more than enough to gain entry in the Russell 2000 this year. 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. I feel that Vringo has a remarkable chance of becoming part of the Russell 2000 and if Vringo is indeed added to the list, its share price will be rewarded handsomely.
Reason I Wouldn't Want To Short Vringo:
1) Russell 2000: Like I've previously stated in this article, Vringo stands an excellent shot at becoming a member of the Russell 2000. If Vringo is indeed added to the list, its share price will be rewarded.
2) Vringo vs Google: The case is finally winding down as we now await Judge Jackson's final ruling on the case. Vringo has a great shot at receiving an enhanced royalty rate because of Google's (GOOG) continued and willful infringement, not to mention the countless case law examples supporting Vringo's argument.
3) Microsoft settles with Vringo: As of right now, nobody except Vringo and Microsoft know what the patents are. Investors should trust the management of Vringo as they have a plan; why else would they take the six patents from Microsoft? The settlement shows the legitimacy of Vringo's patents and what it has. The patents could be worth a lot more than a couple hundred million that Vringo could have received from Microsoft. They could also be worth a lot less. My trust stands with Vringo.
4) Vringo vs ZTE: What seemed like an eternity just a couple of months ago, is now only four months away in the trial of Vringo vs. ZTE, set to begin on October 15, 2013. Markman hearings, as well as a possible settlement before trial, should generate some profitable price swings over the coming months.
5) Future lawsuits and projects: Over the last year or so, Vringo has built its portfolio of patents by buying them or through the use of partnership programs. In March, Vringo partnered with Virginia Tech, which helped Vringo conduct related research and development to secure future licensing rights.
In November, Vringo acquired patents from Quantum Stream that relates to the placement of content on web pages.
Then just recently Vringo aqcuired six patents from Microsoft. While we do not know what those patents consist of as of yet, you can bet the farm that Vringo thinks very highly of them. Whether it uses them in current litigation cases (ZTE) or for future cases like Facebook (FB), Yahoo (YHOO) you can rest assured that Vringo has a plan for them.
As you can see, Vringo has many positive things going for itself as a company as well as several upcoming catalysts coming its way. Because of this, I would not want to be shorting Vringo at these low levels. With over 17 million shorts any positive news could trigger a short squeeze and send shares of Vringo flying. 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.