These 3 Stocks Might Be Great for Gambling, but They're Terrible Investments

Great investments can be risky. But that risk is always balanced by an outsized potential return, dampened by strong fundamentals, and ultimately defused by strong management with a vivid and long-term business plan. There's no such thing as a safe bet, but many of the best wealth-creating investments come very close. In the long run, making a number of these low-risk investments will set you on the path to long-term riches.

And then there are the poker chips masquerading as investments.

Does this look like a hotbed of solid investing to you?

Stay away from these at all costs. When obvious risks gather over your chosen ticker, and don't have the advantage of terrific management, solid financial footing, and reasonably strong returns, you're better off just buying a Dow Jones (DJINDICES: ^DJI  ) tracker ETF fund instead.

Let me show you a few examples of what to avoid. Spoiler alert: turnaround plays are notoriously difficult and rarely worth the risk.

BlackBerry (NASDAQ: BBRY  ) led an unsuspecting world into the smartphone era with a bevy of secure, reliable, and beautiful keyboard-equipped handsets. Before Android vs. iPhone, it was all about the CrackBerry, so nicknamed because of its addictive effect on early adopters.

But the Canadian company missed the boat when smartphones grew into the consumer space, and then the rot spread into BlackBerry's traditional corporate market as well. Now BlackBerry has lost all credibility as a smartphone provider, the stock has lost 93% of its value in six years, and heads have rolled in the executive suite. Meanwhile, the Dow gained 44% -- and that includes the bloodcurdling 2008 crash.

BBRY Revenue (TTM) Chart

BBRY Revenue (TTM) data by YCharts.

It may seem tempting to pick up some BlackBerry shares on the cheap, hoping for a rebirth in secure messaging software or maybe patent-wrangling lawsuits. Feel free, but don't call it an investment.

Even new BlackBerry CEO John Chen might agree. He recently said that his turnaround efforts have "a 50/50 chance" of getting the company back on track. If that doesn't happen, the stock can still fall much further.

Chen's levelheaded realism is the one thing that BlackBerry has going for it these days. If even he admits that he's basically running a gamble on a grand scale, why should investors feel any different?

VirnetX (NYSEMKT: VHC  ) is a very different beast. BlackBerry knew success firsthand but lost it. VirnetX is still trying to make its first splash, in a lawsuit-powered strategy with very little business substance.

The company holds about 50 U.S. and international patents on aspects of data security. The big dream is to make billions as 4G mobile networks allegedly must use VirnetX security features -- for a fee. On that basis, the company has sued a number of tech giants in the hopes of a big payoff, or at least some major settlements. A couple of court decisions have gone VirnetX's way, but only one settlement so far has resulted in a cash payment.

So VirnetX keeps knocking on courthouse doors (mostly in notoriously litigant-friendly Tyler, Texas), while its much bigger and richer targets prefer to appeal their losses rather than paying up. Tech industry targets stand united in believing that VirnetX's claims are hogwash.

Meanwhile, VirnetX burned $27 million on the bottom line last year on record revenue of $2.2 million. There's no genius management going on here -- the company is racing against the clock as that single settlement is paying for operations four years later, and that imagined payoff looks like a huge mirage.

Again, gamble with VirnetX all you want, but don't call this an investment. This stock can't hold a candle to the Dow.

VHC Chart

VHC data by YCharts.

Let's end this with a dead retailer walking.

RadioShack (NYSE: RSH  ) seemed to be marked for the graveyard in 2008. The electronics seller still had cash reserves and a positive net margin, but sales were in a freefall. The stock had lost about half its value over a three-year span, and already earned a shameful one-star rating in our CAPS system.

The rise of online commerce continued to take its toll on RadioShack, but somehow the death blow never landed. Until now.

The struggling retailer is closing 1,100 stores, reducing its physical footprint by about 20% in one fell swoop. The chickens are coming home to roost. Once worth more than $12 billion, RadioShack's market cap is down to just $220 million.

If you want to bet on a turnaround from this level, you're a braver card shark than yours truly. This is the kind of unstoppable death spiral that even a world-class turnaround genius couldn't stop. The financial platform is nonexistent and I'm not sure that there's a future for mall-based retail specialists anymore.

Once more, RadioShack investors would have done far better with a simple Dow tracker, such as the SPDR Dow Jones Industrial Average ETF (NYSEMKT: DIA  ) . And there's no reason to believe that RadioShack will return from the brink this time.

RSH Market Cap Chart

RSH Market Cap data by YCharts.

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  • Report this Comment On March 13, 2014, at 3:07 PM, rfpresents wrote:

    VirnetX Vs. Apple At The CAFC: Why VirnetX Will Be Just Fine

    Mar. 11, 2014 6:35 AM ET | 58 comments | About: VHC, Includes: AAPL, CSCO

    Disclosure: I am long VHC. (More...)

    Summary

    VirnetX received a favorable ongoing royalty ruling versus Apple potentially paying them $300MM+ annually.

    The CAFC hearing of Apple's appeal of the original case occurred several days later, and the lines of questioning brought up many valid concerns and rampant speculation.

    Proper due diligence can put a lot of this rampant speculation to rest and demonstrate that this company is a great buy at these prices.

    With the adjudicated ongoing royalty rate in hand, VirnetX is poised to sign non-litigant licensees and increase earnings exponentially.

    VirnetX Holding Co. (VHC) was the subject of two long-awaited events last week. The first, and by far the more important one, was the release on March 4th of Judge Leonard Davis's ruling on an ongoing royalty rate for Apple (AAPL) products. These products were found to have infringed on VHC patents in a jury verdict on November 6, 2012. In his Memorandum Opinion and Order closing the case, issued February 26, 2013, Judge Davis confirmed the jury's findings that a) VHC's patents in question are not invalid, b) Apple was infringing on those patents and continued to do so, and c) Apple shall pay VHC damages of $368.2 million for past damages. At the same time, Judge Davis severed the question of ongoing royalties for Apple's continued and future use of the VHC patents and created a new case to consider an appropriate ongoing royalty rate, which as he said in his ruling, was time-consuming and a moving target. The original case, consisting of the judgment on a, b and c above, was appealed by Apple. The parties filed briefs and supporting documentation over the course of 2013, and the oral arguments to that appeal were heard in Washington in front of a panel consisting of Judges Rader, Chen and Prost last Monday, March 3rd. More on that hearing below.

    On a separate track, Judge Davis held a hearing on August 15th, 2013 (which I attended) in the severed case to determine ongoing royalties. After over six months of deliberation, the case was terminated on February 25, 2014, at which time Apple and VHC were given his ruling to review for purposes of redaction. The mildly redacted ruling (four lines were missing detailing Apple's costs incurred in an attempted workaround) was released on March 4th. The ruling was a resounding win for VHC; it set an ongoing royalty rate of .98% on the price of infringing Apple products, which were defined as all products included in the original litigation, as well as all Apple products which use FaceTime and VPN On Demand in a manner not colorably different from their use in the litigated products. The latter is an enormous victory for VHC; the judge explicitly listed several non-litigated (i.e. newer) Apple products as being subject to this royalty rate (including the iPhone 5, 3rd-generation iPad, etc.), and stated that any future products which use FaceTime or VPN On Demand in the same way are also subject to the royalty. As anyone who has used FaceTime on an iPhone 4, 5 and 5s is aware, the use of these services is identical on all the products.

    What does this extremely favorable ruling mean for VirnetX? According to a high-level analysis by noted Patent Company analyst, IP Hawk, Apple is estimated to owe VirnetX over $340 million in royalties on US sales of infringing products in 2013; I expect impacted revenues (and therefore, royalties) to grow in the future. Once the CAFC ruling is issued (more below), followed by Apple's inevitable lotto ticket appeals for an en banc hearing at the CAFC and a hearing by the Supreme Court, VHC will collect those 2013 royalties (for sales after the Judge's 2/26/13 ruling), as well as the original $368 million judgment plus interest, as well as a daily royalty imposed by Judge Davis between the 11/6/12 jury verdict and the 2/26/13 date of his ruling. In total, once the appeals process is exhausted, Apple will pay VHC over $800 million for past damages and royalties incurred to this publication date - to a company with a market cap of $886 million and a minimal cost structure (as a royalty company, VHC has 12 employees - most technology development is contracted under the supervision of VHC's CTO and his team of ex-SAIC scientists). VHC will pay legal fees approximately 8% of the litigation proceeds (but not ongoing royalties) to counsel, as well as 25% of litigation proceeds (but not ongoing royalties) net of legal fees to SAIC, the original holder of the patents and where VHC's current technical team invented the technology. As a ballpark figure, I'll estimate litigation proceeds plus interest and pre-judgment royalties at $450 million. After payments to counsel and to SAIC, VHC will be left with $310 million, pre-tax. CEO Kendall Larsen has said at past shareholder meetings that he expects to distribute net litigation proceeds for past damages to the common shareholders via dividend; in keeping with that approach, VHC paid a special dividend following the settlement with Microsoft in 2010. Assuming a distributable base of $200 million, the company could pay a dividend of $4.00 per share on the 51,236,141 million shares outstanding. This is a potential one-time payment in late 2014 or early 2015, and excludes the value of ongoing royalties from Apple and licensing revenue from other companies. Not bad for a stock that closed at $17.34 last Friday. If IP Hawk's estimates are correct (and they usually are), an ongoing quarterly dividend of $1.00 per share could easily be paid from Apple's ongoing royalties. At a 4% yield, the Apple payment alone would justify a $100.00 stock price, almost 6 times the current level. Apple won't be the last source of revenue, however - once Apple is finally beaten, other companies will come to the table. This licensing could begin soon, as non-litigant licensees were likely awaiting Judge Davis's royalty rate ruling to finalize their deals with VHC; that impediment has been removed.

    As a number of skeptics have pointed out this week, the .98% royalty rate is meaningless if the damages ruling supporting it is struck down by the CAFC. That's not likely to happen, and here's why. Much ado has been made about the CAFC judge's questions in regard to damages models in the recent appeals hearing of VirnetX vs. Apple. The Nash Bargaining Solution (NSB) came under attack as an over-glorified 25% rule. VirnetX's use of the smallest salable patent-practicing unit (SSU) has been obfuscated with the Entire Market Value Rule (EMVR). Even the reasonable royalty approach (RRA) of Georgia-Pacific found its way under the microscope, as the apportioned revenue base came into question. If these damages questions are properly considered by the CAFC, as we believe they will be, all of Apple's current products that have the FaceTime and VPN On Demand features will be adjudged infringers, and Apple will owe .98% of the lowest-ever sales price of all of the U.S. sales of these units. This number equates into the $400-$500MM annually that Apple will be paying VirnetX until these patents run out, the earliest of which is 2020.

    In an interview, Judge Rader shared, "I like to use an analogy which people understand quite readily; and that is, you go to a realtor and you ask a realtor what enhancement to the value of their home will they get if they add a second garage or if they change the countertops in their kitchen or if they put a bathroom in the basement. And realtors can tell you with great confidence, magnificent accuracy, and some dependable uniformity within a thousand dollars or so what each of those components of the larger salable unit, the house, is worth. And that's often what we are doing in our intellectual property cases. We are trying to decide what this claimed invention, which is a tiny component or maybe a larger component, but it's a component of a larger device or process, what is the value of that component? Well, that's like, is it a countertop or is it a second-car garage? The realtors can do it. Why can't we?"

    And how did Mr. Weinstein (VirnetX's expert witness) ascertain the value contributed to Apple's products by the FaceTime feature? "I did it by looking at Apple's own documents to see how Apple itself measured the extra value associated with FaceTime… there are two features that are being added simultaneously for which Apple intends to get an additional $30 in price… I took 50 percent of that incremental revenue of $30, half of it, and that gets associated directly with the addition of the FaceTime functionality… but Apple has costs that it incurs in generating that revenue. So you have to -- you have to back those costs out… so I applied those margins to the revenues in order to obtain the incremental profits that's then available to be split between Apple and VirnetX… And then I split that with half -- excuse me -- with 45 percent going to VirnetX and 55 percent of that incremental profit going to Apple." That looks a lot to me like Mr. Weinstein priced out Judge Rader's kitchen countertop. The jury award actually works out to 22.685% of the incremental profit of FaceTime. That may seem like a lot, but if FaceTime wasn't a seamless one-click connection with no need of entering log-in or password information and didn't have end-to-end security, would people actually be using FaceTime at all?

    The CAFC has rightly done away with the 25% rule for starting at a randomly devised, arbitrary number. A recording of the CAFC hearing is available for download at no cost. Nash's premise of if all things being absolutely equal, then the incremental profit from the patented feature is split 50/50 may seem arbitrary as well, but given that in a hypothetical negotiation there are three logical places to start, I get all the profit, we split the profit 50/50, or I get none of the profit, which of these starting points is less arbitrary? Did I mention that Nash won the Nobel Prize for Economics, in part, for his work that evolved into the Nash Bargaining Theory?

    As it pertains to the smallest salable patent-practicing unit (SSU), the Entire Market Value Rule (EMVR) is an exception to that rule. The EMVR is a subset of the SSU. As was argued by Apple in the CAFC hearing, the SSU is a subset of the EMVR. In the instances where VirnetX employed the SSU, Apple argued that they were improperly employing the EMVR. As the SSU and EMVR are current hot buttons of the CAFC, this tactic was bound to draw a lot of attention from the CAFC panel during oral arguments. Apple's position was that a Mac software upgrade, available for $29 dollars, became the SSU for the entire product line, including all mobile devices, and that by using a royalty base of the lowest price ever sold for these mobile devices, VirnetX was invoking the EMVR . In Apple's defense, in an otherwise hopeless situation, where you must stand in front of a panel of judges and attempt to find a reason for remittitur or a new trial, using such obvious hot buttons and hoping for confusion does make some sense. However, they are trying to imply that a Mac is a mobile device, or conversely, that an iPad or iPhone is a desktop computer. Unfortunately for Apple, VirnetX did use the SSU, $29, in calculating the royalty for a Mac computer, thus demonstrating their understanding of which SSU to use for which devices.

    This SSU versus EMVR argument also creeps into Apple's objections for the reasonable royalty approach (RRA) using Georgia Pacific, and for the same reasons, VirnetX's reasoned approach of using the SSU of a desktop for a desktop device and a mobile SSU for a mobile device. This argument should not confuse this panel for the same reasons. An interesting note here is that Judge Rader is credited as being the father of the phrase "smallest saleable patent-practicing unit" for his ruling in the Cornell vs. Hewlett-Packard trial.

    As it had not been thoroughly discredited yet by the trial date, VirnetX does introduce the EMVR as a third damages model. This model found reasonable damages to be $749MM. Apple argues that by introducing this number to the jury, VirnetX has polluted their minds with an astronomical figure. The problem here is that the NBS found damages to be $730MM, and the RRA, damages of $708MM, numbers that are all in the same ballpark. It should also be noted here that in Judge Davis's discussion of the damages numbers presented at trial, he observes that the jury took the initiative to not accept either party's number, but decided on the damages themselves.

    With all of the hoopla of the CAFC hearing and the royalty rate announcement being issued on the same day, there were negative articles, message board comments and tweets flying like artillery shells while Francis Scott Key was trying to work. Select quotes from the CAFC hearing, and the fact that in appeals court the victorious party is the one being "attacked" made for a very unfortunate decline in stock price of VirnetX these past few days. I feel this decline to not only be unwarranted, but a genuine opportunity to grab shares of an up-and-coming high-flyer.

    VirnetX currently has a motion for JMOL, or new trial versus Cisco (CSCO) ripe for adjudication and pending litigation versus Apple for its newest products and iMessaging system, as well as Microsoft for usage not covered under the initial licensing agreement, i.e. Skype. With the CAFC hearing over and the company looking well-situated to win the appeal, I fully expect these litigious issues to be settled and other licensees to sign-up quickly. VirnetX's patents secure the LTE-Advanced communications network (although not proper usage, think 5G) of the ever-nearing future. I also believe system integrators (such as Juniper and Ericsson) and handset makers (such as Motorola, Sony and Samsung) will begin licensing in earnest.

  • Report this Comment On March 13, 2014, at 7:28 PM, preali1 wrote:

    I am long on VHC and have been for 5 years, and Anders Bylund has been bashing this stock for as long as I can remember. VHC has no bad news to report, only good news to those who investigate the facts. It is a difficult investment to understand but well worth investigating. Everytime VHC has good news to report, the paid shills come out of their holes and begin shouting that the sky is falling. They work in consort with certain hedge funds that use these articles to protect their short interests. Anders has been predicting disaster and is always wrong. Read the preceding article for information that is based in fact. Lumping VHC with Blackberry and Radio Shack shows his complete careless attitude and lack of understanding of the facts associated with VHC.

  • Report this Comment On March 17, 2014, at 11:47 AM, gimtagel wrote:

    I am long VHC and agree that Mr. Bylund did little or no due diligence before making his remarks. I do not consider his opinion to be well informed. VHC is certainly highly speculative as a stock, but there is no doubt that it proved in court that Apple infringed on VHC patent and that royalties as well as damages are to be paid. It is every investor's job to do the research necessary to determine whether or not a stock is worthy of their hard earned capital. A first step would be to look past vacuous articles with no facts given or assessed. Dig deep to get as accurate a picture as possible.

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