As I watched Vringo's (VRNG) shares sink into the close yesterday following their dramatic court victory over Google (GOOG) last Tuesday, I had to laugh. While the stock was halted in premarket yesterday, social media was abuzz about how the stock would open at $8 or $10 a share. And a sea of virtual backslapping was going on, with longs congratulating one another on their "patience". Rewards come to those who wait, right?
When the stock hit a top of a mere $5.86 early in the session, I noticed some interesting, yet sad trends. Folks that were busy trumpeting the stock in premarket suddenly went quiet; in fact, many disappeared altogether. And despite Vringo holding onto the $5 mark for most of the day, the stock stopped trending on StockTwits, showing that most people took their meager profits and moved on.
That was predictable.
In my last Vringo article, I got some flack from longs for calling the stock "dead money". But what's interesting is that many people that held the stock for around two years, apparently sold yesterday for about a 62% gain. Dividing that by the waiting period, you get a 31% annualized gain. The problem with that is that you could have invested in a biotechnology index and crushed those gains, with a far less turbulent ride along the way. I personally used my previous Vringo investment to ride stocks like Galena Biopharma (GALE), Dynavax Technologies (DVAX), amongst others to over 300% gains in only four months.
So, I am confused as to why longs were so enthusiastic yesterday only to sell themselves short? In fact, the real point of this article is that their myopic profit taking made this winner into a loser.
What do I mean?
It's no secret that many large funds cannot buy stocks under $5 a share. What I found intriguing was that shorts appeared to be attacking Vringo yesterday to get it below this critical level; otherwise they would be fighting bigger players instead of retail investors going forward. That's a harder battle to win.
And who won this battle?
Shorts did-but with the help of previous longs! Per the last short numbers, Vringo had a massive short float of around 24%. To set up a short squeeze as many were hoping, the stock simply needed to stay above $5 to attract larger players. Now that the stock has failed to hold this critical level and Google is unlikely to hand over cash anytime soon, it's entirely possible Vringo will sink back into the $3's. Sigh...
Why do I think the shorts will continue to win?
The psychology of the Vringo retail crowd is browbeaten to say the least. Because the stock has failed to hold onto gains in the past, longs were eager to take their gains yesterday and head to the hills. What they left behind, however, was a stock with major potential. Yet, they allowed fear to guide their investing decisions. Not a good recipe for success.
What should you do as a long?
Simple: Buy the damn stock. After Vringo receiving a near double on the royalty rate and the workaround was deemed to be bull by the Judge, the stock has been heavily de-risked. If you haven't gotten the message yet, you need to understand that the Judge has penalized Google for wasting the Court's time. By upping the royalty rate significantly, he made his belief loud and clear: Google is dragging its feet on concluding this case. And as we've seen from all of the motion activity, Google has little to stand on in an appeal.
Why I think Vringo is stupid cheap
Ok, I am a biotech guy. So, please excuse the following analogy, but I think it helps investors to understand why Vringo is dirt cheap now.
I think there are several parallels between Vringo's court case, and a development stage biopharma's clinical activities. After Tuesday's ruling, I view Vringo like a developmental stage biopharma with a drug that just showed stellar clinical results in a pivotal Phase 3 trial. Moreover, the drug is expected to generate about $300 million a year in revenues. So, it's not a blockbuster but the drug still offers a strong value proposition to investors because of the company's tiny market cap.
Looking ahead, the pending appeal is highly similar to the regulatory filing for a promising new drug. You have to wait around 8-12 months to know the final result, but you have a fairly good idea of how it will ultimately play out based on prior events. In sum, there is still risk, but the biggest risks are in the rear view mirror.
And we can take this analogy further. Because royalty payments will be placed into an escrow account pending the appeal, Vringo stands to get a nice one-time boost to their earnings if Google is unsuccessful in their appeal. And the longer this takes, the more will end up in the till. My view is that this is highly similar to a developmental biopharma receiving a big milestone payment from a partner. Think Eisai and Arena Pharmaceuticals.
Wrapping up this analogy, Vringo's market cap of roughly $400 million this morning is insanely cheap compared to its value proposition. By comparison, a developmental biopharma on the verge of getting a drug approved, that would generate $300 million per year in sales, would easily be trading at a market cap of $500 million.
So why isn't Vringo valued higher? I think the answer is simple: the shorts have poisoned the mind pool surrounding this stock. As such, Vringo loses even when it wins.
Additional disclosure: I purchased VRNG LEAPS recently.