Seeking Alpha
Newsletter provider, dividend investing, long/short equity
Profile| Send Message| ()  

"A tidal wave of intellectual property is about to be busted out of S&P 500 companies."

That's what one presenter said at last week's MDB Capital's Bright Lights Conference in New York City.

Count me in as a believer.

After all, S&P 500 companies have an estimated $7 trillion worth of intangible assets sitting idle on their balance sheets. (Intangible assets include patents, copyrights and trade secrets.) That's an enormous amount of potential value, just waiting to be unlocked.

Here's the good news: That value is starting to be unleashed.

Even better news: Most folks on Wall Street are too preoccupied or too neglectful to see it. That opens the door for us. So let me share a way to profit from this before everyone else wises up …

Ignorance May Be Bliss … But it's Not Profitable

Try to think of a Wall Street analyst who routinely takes a company's patent portfolio into account when he's determining a target price for the stock.

Okay, that's enough thinking.

To my knowledge, none exist. Instead, analysts routinely ignore patents. And why not? Since patents are categorized as intangible assets, conventional wisdom suggests that by their very nature, they're unable to be priced.

But conventional wisdom is wrong! Patents have a definitive market value.

For proof, consider VirnetX Holding Corp. (VHC).

The company was formed in 2006 by simply purchasing a portfolio of 19 patents from SAIC, Inc. (SAI).

As management stated in the company's regulatory filings, "Our portfolio of intellectual property is the foundation of our business model … We expect to derive the majority of our revenue from license fees and royalties associated with these patents."

In other words, these executives understood the patents were enormously valuable. They formed a company and bought the patents to prove it. And they did just that!

Consider: After paying only $35 million for the patents, last year VirnetX secured a $200 million settlement in a suit against Microsoft. And now the company's patents are worth $1.2 billion, based on the VirnetX's current market capitalization.

Now, if that's not real world, "tangible" value, I don't know what qualifies.

And I'm sure early VirnetX shareholders would agree, too. They've more than quadrupled their money.

In addition to proving how enormously valuable patents are, though, the VirnetX example underscores another key point …

There Goes the Boat … and Wall Street's Missed it Again

If Wall Street analysts truly understood the value of intellectual property, they would have been pounding their fists on the table to buy VirnetX when it went public via a reverse merger in 2007.

But they don't. So they didn't issue overwhelmingly bullish reports on the stock.

Even today most analysts don't understand the company's business or potential.

There's no reason why we should be similarly naïve to such opportunities, though. Especially since Wall Street continues to ignore and/or significantly undervalue intellectual property.

We can exploit such discrepancies for our own profits. Here's how…

Two Ways to Patent Your Way to Profits

The best way to make money from intellectual property is to identify small cap companies with the strongest patent portfolios, and then scoop up shares before Wall Street analysts have a clue.

Of course, that requires extensive due diligence, including attending conferences and meeting with management, like I did at the conference last week. And I walked away from it with several top-notch opportunities that I'll be revealing to my paying White Cap Report subscribers soon.

While I can't share the names of those companies here, I can give you an alternative way to profit from intellectual property – Acacia Research Corp. (ACTG).

Acacia essentially partners with patent owners to monetize their intellectual property. And quickly. On average, it only takes Acacia 14 months to start deriving revenue from a patent, thanks to its focus on patents that are already being infringed upon.

In most cases, Acacia shares 50% of the revenue derived from each patent. And such an arrangement adds up, as Acacia has increased its revenue by an average of 48% each year since 2005.

The company currently owns interests in over 170 patent portfolios. And it's executed over 1,000 license agreements to date, again underscoring the real-world value of intellectual property.

According to CEO, Paul Ryan, even if the company stopped acquiring patents today, it could still increase revenue for another three to four years, based on the current patents it owns. Very few, if any, companies can make such growth claims.

In the end, Acacia might not offer the explosive upside potential associated with an opportunity like VirnetX. But it does represent a no-hassle, diversified approach to profit from a trend most on Wall Street remain clueless about.

And it should reward shareholders, too. So don't miss out.

Source: Plays on the Intellectual Property That's About to Break Out of S&P 500 Companies