Many people like to follow what investors are buying, selling and shorting. So I began looking over the latest short interest figures of some well known patent companies. These companies are VirnetX Holding Corp. (VHC), Vringo Inc. (VRNG), and ParkerVision Inc. (PRKR).
It is well known that many investors use short interest to make predictions about the direction of a particular stock and to measure the bullishness or bearishness of it.
Short interest is an indicator of what short sellers think about a particular stock. 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 will likely be going back up.
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.
VirnetX Holding Corp.
VHC has a market cap currently of $976 million, with its most recent closing price of $19.08. VHC has over $46 million in cash and no debt. As of September 30th, VHC had short interest of 14.6 million, representing a decrease of 700K or 5% since September 13. The short float now stands around 35% with the days to cover ratio at 43.4 days. Analysts have an average price target of $52.50 on VHC, which would reflect an increase of over 175% from its recent closing price.
VHC is well known for its $200 million settlement with Microsoft (MSFT) back in 2010, and its $368 million award (now close to $440 million due to pre and post-judgment interest) against Apple (AAPL) last November.
Right now shareholders are waiting on Judge Davis to decide on a couple of matters. First, he will decide the royalty rate going forward. It's known that VHC has argued for a rate close to 1.5%. Second, he will decide whether or not Apple's future products are still infringing on VHC's patents.
As we can see from the chart below, short interest hasn't swayed too much trading in a tight range over the last couple of months. However, it's interesting to note that the latest short figures show VHC's short interest has dropped to it's lowest point in over a year. It's possible that the shorts are starting to get out before the decision is made regarding the royalty rate etc.
If VHC receives good news from Judge Davis then shares could explode again like we have seen them do before. It's also interesting to note how high the days to cover ratio has become over the last couple of months. Bottom line, shorts could be playing with fire soon.
Vringo has a market cap currently of $227 million with its most recent closing price of $2.73. Looking over Vringo's financials we can see that the company has over $46 million in cash and no debt. As of September 30th, Vringo had short interest of 19.7 million, which represents a decrease of 300K or 1.5% since September 13. The short float now stands around 28% with the days to cover ratio at 13.8 days. Analysts have an average price target of $5.50 on Vringo, which would reflect an increase of over 100% from its recent closing price.
There has been some recent events with Vringo that has caused the short interest to go back and forth. Let's look at some of the reasons:
- Vringo sues ADT and Tyco. Vringo alleges that ADT and Tyco's security systems infringe on U.S. patent 6,288,641 relating to remote monitoring/surveillance. This patent is one of the 500+ patents/applications that Vringo purchased from Nokia last year.
- Vringo has filed a suit against Asus. Vringo alleges that the mobile OEM's hardware infringes the German part of an EPO patent covering mobile/Wi-Fi hotspot functionality.
- Vringo vs ZTE infringement hearing is now scheduled for November 12, 2013. On October 9, 2013, Vringo was notified that the hearing on infringement that was originally scheduled for October 15, 2013 will now take place on November 12, 2013.
- In August, it was determined that Google's U.S adwords would be set at 20.9%, as well as Vringo being entitled to supplemental damages pre-/post-judgment interest relating to last November's infringement verdict.
As you can see from recent events, some of these announcements were positive and not so positive. Timing is everything when it comes to patent stocks, which is why rescheduling of hearings and events can have such a negative outcome on shares.
By now, investors know the story of Vringo vs Google (GOOG) [David vs Goliath]. David beat Goliath, but Goliath isn't going down without a fight. Google has used and continues to use every method it can in order to try and get out of this mess.
Currently, Vringo and Google are both awaiting on Judge Jackson's post trial ruling's as Vringo has asked the judge to award an enhanced royalty rate (5%-7%) because of Google's ongoing infringement. If such an award is indeed granted, Vringo would stand to receive over a billion in royalties. Not bad for a small company that Wall Street currently values at just $227 million.
As we can see from the chart below, short interest has been steadily on the rise over the last couple of months. With the way the case has been handled, shorts have shorted every major pop without fear it seems. However, if a royalty rate of more than 3.5% is granted, you can be sure to see a huge rise in share price. With over 28% of the float short, a short squeeze could easily send shares to levels it hasn't seen before.
ParkerVision has a market cap of $226 million with its most recent closing price of $2.45. ParkerVision also has over $13 million in cash and 21K in debt. As of September 30th, ParkerVision had short interest of 20.6 million, representing an increase of 1 million or 5% since September 15. The short float now stands around 23% with the days to cover ratio at 32 days. ParkerVision has a price target of $11.75, which would reflect an increase of over 300% from its recent closing price.
On October 7, 2013, ParkerVision announced the start of their Qualcomm (QCOM) patent infringement trial. Shares have reacted quite negatively since the trail began, as it seems that nervous investors are cashing out and playing it safe. I can't blame them since the fate of the company seems to be hanging on the jury.
As we can see from the chart above, ParkerVision has no revenue stream and does not have a lot of cash. ParkerVision has already issued a secondary offering to raise capital this year, and if they are not successful at trial, will likely be forced to issue another offering. Shorts know this and have been increasing their positions in ParkerVision.
Looking at the chart below, we can see that shorts have and are continually increasing their positions in ParkerVision. Unless ParkerVision receives a favorable outcome against Qualcomm, shares could fall on hard times. However, if ParkerVision comes away victorious, a major short squeeze will be in the works with more than 23% short.
NYSE & Nasdaq
Just 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. From the updated short interest numbers, we can see that short interest has increased to 7.58 billion shares as of September 30, compared to 7.54 billion back on September 13.
The New York Stock Exchange Group, Inc. based on information received from its members and organizations, had short interest decrease to 13.6 billion as of September 30, compared with 14.0 billion on September 13. The chart below shows the trends.
Looking over both the Nasdaq and NYSE figures we can see that short interest hasn't changed much over the last few months. I was a bit surprised to see this, especially considering the big summer run that the markets went on. However, because of events over the last couple of weeks (government shutdown), it will be interesting to see in the next report if there is a big change in short interest and if shorts capitalized on that opportunity.
Because these are speculative stocks with a high percentage 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 should remember that there are many other factors to consider when looking at stocks such as what insiders are doing etc. Nevertheless, investors that can identify the trends from the short interest figures stand to greatly benefit from it.
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.