Has VirnetX Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether VirnetX (NYSEMKT: VHC  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, and with the understanding that these factors don't always work well with companies that don't have traditional business models, let's take a closer look at VirnetX.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

54%

Pass

 

1-year revenue growth > 12%

1,343%

Pass

Margins

Gross margin > 35%

100%

Pass

 

Net margin > 15%

NM

NM

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

10.60

Pass

Opportunities

Return on equity > 15%

(40.4%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 8

Source: S&P Capital IQ. NM = not meaningful because of negative earnings and negligible revenue. Total score = number of passes.

Since we looked at VirnetX last year, the company has seen its score climb substantially, largely because of high percentage gains in revenue. Investors have also been optimistic about its prospects, as the stock has risen 50% over the past year.

VirnetX is a company that owns intellectual property related to keeping 4G LTE communications secure. Having obtained those patents from former parent SAIC (NYSE: SAI  ) seven years ago, VirnetX has spent much of its history in court trying to collect damages from tech companies that VirnetX claims infringed on its technology.

VirnetX has had considerable success in its legal efforts. In November, it won a $368 million jury award against Apple (NASDAQ: AAPL  ) over allegations that Apple's FaceTime video-calling service infringed on its patents. With post-trial motions still ongoing, VirnetX hopes to get an injunction against Apple pending a possible appeal of the jury verdict.

Yet so far, VirnetX hasn't been able to generate much recurring royalty income from its past victories. As a result, investors will have to hope for similarly positive results in VirnetX cases against Cisco Systems (NASDAQ: CSCO  ) , where VirnetX is targeting VPN routers and voice-over-Internet products, and Siemens (NASDAQOTH: SIEGY  ) .

For VirnetX to improve, it needs to keep winning its patent fights and exhaust its opponents' remedies for appeals and other delays. Until it reaches final resolutions of its cases, VirnetX will be a highly speculative play dependent on favorable rulings for its main profit potential.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

VirnetX's courtroom victory aside, investors are wondering whether Apple's stock is still a buy. Find out what you need to know about Apple from senior technology analyst and Fool deputy managing editor Eric Bleeker, who is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Click here to add VirnetX to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (3) | Recommend This Article (12)

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 February 24, 2013, at 7:49 PM, jlc816 wrote:

    So what was the conclusion RE: VHC. Not the perfect stock or what?

  • Report this Comment On February 25, 2013, at 12:33 AM, ReadMNReap wrote:

    Positive result in regards to Siemens:

    http://virnetx.com/virnetx-and-siemens-enterprise-communicat...

    Should destroy Cisco like they did Apple. Willful infringement on tap for Cisco as well.

  • Report this Comment On February 26, 2013, at 10:55 PM, jimlin1 wrote:

    All of the parameters you set forth under "the quest for perfection" are absolutely correct for the normal, mainstream stock that one may wish to research/purchase (due diligence), however, VHC has not yet attained that status of being a normal, mainstream stock. "Speculation" is the key word here with reference to VHC. They have done a masterful job at asserting the value of their intellectual property in the courts having beaten Microsoft and now Apple. Other foes have already fallen by the wayside and Cisco and Siemens are up next and are sure to fail. Royalties are sure to follow and one of the Goliaths may view little David as not only a force to be reconed with but also an extremely viable partner to acquire for a future revenue stream. In addition, you have not brought into light the agreements already signed in the EU with reference to most, if not all, 4g telecom companys there having to adopt, use and pay royalties to VHC for its domain security art...another important revenue stream. All in all...VHC may not completely fit all the parameters for your "quest for perfection" scenerio but, to be sure, VHC is a stock that should be owned for its future, speculative value...and, after all, aren't most stocks somewhat speculative in nature?!?! I see VHC @ 150 in the near term and am long.

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