Buy, Sell, or Hold: VirnetX Holding

Might you be interested in a stock that gained 576% in 2007, nearly 100% in 2009, and more than 400% in 2010? I thought so. I'm referring to VirnetX Holding (AMEX: VHC  ) , a company holding patents related to LTE 4G security technology. (LTE 4G offers fast transmission and is serving smartphones well.)

You wouldn't be alone in being intrigued by the company, but it has a lot of detractors, as well. Let's explore whether you might want to buy, sell, or hold it.

Its main appeal for investors lies in its technology patents, which focus on securing real-time communications, among other things. These patents can be licensed to other companies and they can also provide some revenue when other companies infringe on them, are sued, and end up forking over millions. As of May, the company held 100 patents and had 32 more pending.

For example, VirnetX benefited from a big patent infringement win against Microsoft (Nasdaq: MSFT  ) , where the software giant lost, and then ended up settling for $200 million. A chunk of that went to SAIC, and about $24 million was paid out to VirnetX shareholders as a special dividend (representing a whopping 8% yield). Meanwhile, there are suits against Cisco Systems and Apple, among others. A glance at its news archive shows many notices of lawsuits.

It's not inconceivable that some technology giant might acquire VirnetX for its patents, and possibly to avoid future lawsuits.

Another reason to consider buying is because so many investors are bearish on the company, with 24% of the stock's float having been shorted. If you go long on VirnetX and the stock rises, over time those shorters will decide to throw in the towel and get out. To do so, though, they'll have to buy back shares on the market and will thereby drive the share price up further, benefiting you. (This is a "short squeeze.") But then...what if the shorters are right?

So why are the shorters so negative on VirnetX? Well, some take issue with the company's litigiousness, suggesting that they'd rather see the company more focused on developing new technologies.

In looking over a management presentation, I was a little dismayed to see that the first three slides in the initial "Performance Recap and Highlights" section focused solely on stock gains instead of more operational achievements. After all, a stock that has quadrupled hasn't necessarily deserved to quadruple, and may not quadruple in the future.

You might also sell if you don't like volatile stocks. Remember those heady gains I mentioned at the beginning of this article? Well, I left out 2008, when VirnetX's stock plunged 75%. Can you handle moves like that? This stock isn't for the faint of heart.

If you're uncertain how you feel about VirnetX, you may want to hold on to your shares, or hold off on buying new ones. There is considerable uncertainty. Defending patents in court can be quite lucrative, but it's also far from a sure thing. VirnetX won't always win in court, and legal wrangling can be expensive. The suit against Microsoft cost $40 million.

You might also wait to see if VirnetX's technology really is, or becomes, a standard in the industry. Be wary of hype leading to great expectations that may not materialize. While you wait, you can add VirnetX to My Watchlist, which can help you zero in on all of our Foolish analysis on it -- and other stocks.

The verdict
I'll be passing on VirnetX, as there are clearly other promising stocks with less risky propositions. If you're really taken with the idea of technology licensing companies, two possibilities to consider are Universal Display (Nasdaq: PANL  ) and InterDigital (Nasdaq: IDCC  ) , both of which are profitable. Universal specializes in organic light-emitting diodes (OLED) technology and collects a small fraction of revenues from Samsung televisions, and a similar long-term contract with LG is likely also in the works. InterDigital has been growing briskly and enjoys fat profit margins, but it's also interested in being acquired, which can limit its ultimate upside for investors. Still, both are well worth a look.

If you're in the market for another portfolio candidate in the wireless connectivity field, check out -- for free -- our special report, "The Next Trillion Dollar Revolution," which details a company set to benefit strongly from the mobile revolution.

Longtime Fool contributor Selena Maranjian owns shares of Microsoft and Apple, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Apple, Microsoft, and Cisco Systems. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Universal Display, InterDigital, Cisco Systems, Apple, and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2012, at 4:40 PM, waterworksjeff wrote:

    "In looking over a management presentation, I was a little dismayed to see that the first three slides in the initial "Performance Recap and Highlights" section focused solely on stock gains instead of more operational achievements".--

    The presentation was given at the annual SHAREholder meeting! What were they supposed to be recapping, besides the price of their shares and what they have done to take them there????

    "some take issue with the company's litigiousness, suggesting that they'd rather see the company more focused on developing new technologies." Quoting Anders Bylund's position on VHC is about as meaningful as quoting the Pope's position on who will win this year's Super Bowl. Both know that the subject that they are talking about exists, but they both have a very limited knowledge of anything else regarding the subject and have obviously done no research to back up their assertions.

    "You might also sell if you don't like volatile stocks."

    think its a pretty fair guess that if they don't like volatile stocks, VHC was never in their portfolio to sell in the first place.

  • Report this Comment On January 20, 2012, at 5:24 AM, Goldmanballsax wrote:

    These patents have already been proven valid.Soon the royalty rate will be set and the stock will be triple digits. There is gold in them Sax.Go get it while you can.

  • Report this Comment On January 20, 2012, at 9:28 PM, istockyou wrote:

    Been in and out of this all last year, this year - have to say it's fish in a barrel.

    Waiting for $12 again, then back in, then back out over $25. Easy money.

    But, I hope I am in when this rockets. Patents are solid. Just ask a real IP firm if they are, the rest of you just speculate.

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