Guest Post!- "A Small Company You Probably Haven't Heard of That Could Make You a Lot of Money"

Virnetx Holding Corporation, VHC, is a company that holds a number of patents in the 4G telecom industry. The patents they own are for a technology they call Gabriel. Gabriel is a complicated software that allows for automatic encryption of data in order to prevent hackers and thieves for stealing data from people. Millions and millions of dollars are being stolen from people every year through these devices and others, and thus the demand for bullet proof security is going to increase tremendously if 4G communications continue to grow. And that’s exactly what we are seeing: Cisco and IBM estimate that the amount of 4G devices will be 25 times the size by 2020.

These patents theoretically make it impossible for any other company to use the same software if it is not bought from Virnetx or used through them in the form of royalties.  So yes, to clarify, Virnetx Holding Corporation is just a small company with only a small patent portfolio. Yet it is poised for incredible growth in the future, or is a likely acquisition target for a larger company in the industry of 4G technology.

    So big companies entering the 4G industry need what Virnetx has. More or less, when a large company such as Google(:GOOG), Apple(:AAPL), or Cisco(:CSCO) want to obtain the ability to create a product that uses similar or the same technology as a smaller competitor owns, they either try to find a way around it through lawsuits and new patents, or they simply buy the patent or company. The valuation of Virtnex is thus based on the demand for 4G security in the future, and as seen above the demand is massive. These companies will continue to wait and try to find a way around companies with patents such as Virnetx and others, but there is a good chance they won’t, and as they wait the demand only increases.

    What it sounds like so far is that a company like Virnetx will be bought out and that’s the only reason to buy the company. However, the company has made a substantial amount of money through winning suits against companies such as Microsoft. They won a lawsuit against Microsoft in 2010 and settled for close to 200 million dollars. Currently, they are entering a suit with Apple. So, now it’s obvious that they can make money through lawsuits too. Virnetx could also be profitable in the future by licensing their technology (Gabriel) to other companies and receiving royalties for use of VHCs product.

It may be impossible for this company to lose. The reason I say this is because they have little or no operating costs, less than ten employees, and all of their technology is stored digitally and thus has a very minimal cost. The only way this company would become worthless is if larger companies who would need this technology find a way around Virnetx’s patents. We have seen thus far, however, that companies like Microsoft (and perhaps soon, Apple) are having trouble getting around VHC’s patents.

Now the last thing someone should know before they decide to buy shares of Virnetx is how perfect the technicals are right now. Currently, the stock is slightly overbought(as of 12/28) and will correct down to around 25.00 dollars before once again gaining momentum to make the 200-50 day moving average cross, or the “Golden Cross”. The stock’s future looks like it can hit 40 dollars a share by June of next year, or maybe sooner. Below is a chart of VHC:

 

-Guest post by Brian Morton 

Market Update

Currently the Dow is down 136 points (-1.1%), the S&P is down 15.5 (-1.22%). and the Nasdaq is down 35.7 (-1.36%).

What seems to be moving the markets today? The answer does not seem to be as clear cut as it usually is. From the news I've gathered, the markets are off today on the large decline in the Euro vs. the US Dollar. The Euro fell 1%, and closed at 1.2939 This seems to have pushed people the press the 'sell' button. Perhaps it is a small spark which has refocused peoples' attention back to the European crisis, which has been largely overshadowed by good news in the U.S. in the past week or so.

The weaker Euro/USD, which means a stronger U.S. Dollar, has hurt commodities today. Gold and Silver have been hit hard, as they are hedges against a weak dollar. When the dollar is weak, people buy gold and silver as "currencies". When the dollar gains strength, people sell off these assets. I believe this is what has happened today, as the ETF that tracks the price of silver (SLV, which I have in my virtual portfolio) is down 5.8%. The GLD is down 2.5%.

Have a look at this link for a great visual explanation of how the Dollar correlates to silver and gold prices.

Here  is a link to a sort of cheesy yet informative video regarding silver and its future prospects. It's only 4 minutes long, you should have a look. 

You will notice also that oil has taken a hit today. "Dollar strength generally depresses commodity prices, as it lowers their appeal as an alternative asset and makes dollar priced commodities more expensive for holders of other currencies" (Forexpros.com). This is part of the story. The other part is that Iran has threatened over the past few days to close the straight of Hormuz- "a vital waterway through which a third of the world's tanker traffic flows — if western nations embargo the country's oil because of Iran's ongoing nuclear program" (Associated Press). This news has caused an increase in the price of crude oil, as it would cause a serious dearth of supply. Supply decreases, price increases. Anyway, the price of crude has come down today as Saudi Arabia has pledged to increase supply to fill any void that would be caused by the action of the Iranians. The U.S. Navy also pledged that any such action by Iran would "not be tolerated". The stronger dollar, along with the seeming resolution to the Iran issue, have caused the price of crude to drop today.

Yes, I did not quite correctly time my purchase of SGY yesterday, as it is down a painful 3.86% for the day. I am not worried though, as I am confident in the due diligence I performed and the long term outlook for oil as an investment. (After all, it's better to hold a company for over a year due to tax benefits.)

The following is a side note inspired by a gentleman who was on CNBC today. He mentioned the returns of the market during different years of the 4 year presidential cycle.

The average return in the 3rd year of the Presidential cycle since WWII has been 17%. In any year that the market has returned less than 8.5% in the 3rd year, the 4th year has returned an average of -10%. Currently, the Dow is up 5% for the year, while the S&P is down 0.6%. What does this say for 2012? Well, if history is to repeat itself, it bodes a negative outlook for 2012, with the potential for a large decline in the indexes. With the European crisis looming, a slowdown in Asia, and the United States' own struggling economy and astronomical debt load, I would have to agree with the prediction that we are due for a decline in 2012. Of course this is just a prediction, and could be terribly wrong. If the situation in Europe is magically solved, then I am very confident we would see the market rise considerably higher.

You're probably wondering what the heck I am doing then being invested in 6 different equities and various ETFs (not all of which are short) for my virtual portfolio.
First, it's a virtual portfolio. This allows me to do things I wouldn't otherwise do if real money was involved. To be quite honest, if it were a real portfolio, I'm not sure I'd purchase any stocks. The market is extremely complex and volatile, and I do not feel that I have enough experience yet to be able to trade and manage a portfolio in this environment.
Second, I really wanted to show my readers how one could analyze different companies for investment. This is what I've done via the "Warren Buffett and I..." stock analysis piece and the various DCF analyses I have performed and shared with you all. Using this data, I compiled a virtual portfolio.
Third, I feel that it is a very strong "long term" portfolio. The most successful investor to ever live is Warren Buffett, and he focuses solely on long term investments. It's said that the reason the wealthy are wealthy is because they have "long term time horizons", while the poor have "short term time horizons". I would say that this philosophy carries over to investing.
Fourth, it is fun to be able to manage a virtual portfolio, without the consequence of losing money along the way.

So as always, never buy stocks based on my recommendations alone. But do enjoy and take what you like from the analyses I will try and provide in weeks to come.

Cheers,
EZ

New Design

You may have noticed the new layout. I hope you like it! It's part of my transition from having the blog be my personal blog, to having the blog be incorporated with either the investment society or a new club I'm thinking about starting during Winter quarter.

On another note, props to Drew Brees for breaking Dan Marino's 1984 record for most passing yards in a single season. Drew Brees has thrown for 5,087 yards this season, or on average 339.1 yards per game. The guy is an incredible athlete.

I hope everyone had an awesome Christmas!

Cheers,
EZ

Get Some Skin in the Game!

They always say that if you're going to invest your money with someone, it's best if that person has some of his or her own "skin in the game". In other words, you wouldn't want to give $100,000 of your retirement to some guy to invest in stocks and bonds if he is completely on the sidelines himself. (That is, is holding all cash) You should feel much more confident in that person if he is currently invested as well, as he not only has a job to generate a return for you, but also for himself. I bring this up because I just bought shares of Stone Energy for my own portfolio.

As you know, it was the strongest of the 3 oil and gas stocks in my "Warren Buffett and I" research, which allowed it to be in my virtual portfolio. Schwab equity reports has an A rating on the stock. I did some research on other stocks' performances after having received a Schwab "A" rating, and they have performed very well. Other analysts have "Buy" or "Outperform" ratings on SGY, with price targets near its 2011 highs of $34-36. Stone is cheap at just 6.6x forward P/E, while its peers are averaging 14.8x. It's price to book value ratio is 1.9. A stock with a P/BV of less than 3 is usually considered undervalued.
(Data taken from stockmarketsreview.com. Here is a link to an informative article on SGY.)

It's technicals look good too. Have a look:

If the blue line (50 day moving average) crosses the red line (200 day MA), that is called a bullish 50/200 crossover or the "golden cross". It is an extremely bullish technical indicator that would imply upward movement in the price of the stock. I've been following SGY for a while now, and I remember looking at it back in October of 2010. Here is what I saw:


Notice the 50/200 crossover? Also notice the well beyond 100% gain in approximately 8 months? Needless to say, I should have bought it when I saw the promising golden cross back in October of last year.

SGY looks like it could be setting up for another run here. Demand for oil will continue to be strong as long as we do not have a global economic downturn.

I've been watching CNBC and a few research analysts have confirmed that they believe oil will remain above $100/barrel going into 2012.

As you see, all data points in favor of Stone Energy being an outperformer in the future. The only thing that could weigh down its future prospects and share price is decreased demand due to crisis in Europe or elsewhere. Either way, I'm confident in my decision that oil will be a great investment in the long term. Hopefully it will be in the shorter term as well.

Not only is Stone Energy in my virtual portfolio, but it is now also in my real portfolio. You better believe I've got some skin in the game. Do you?

Cheers,
EZ

P.S.- Don't buy Stone Energy on my recommendation alone. Always do your own due diligence.