When big-time investors talk (with their money) the rest of us listen. But just because we listen doesn't mean we should always follow their lead because they're going to make mistakes just like the rest of us.
This week, well-known hedge fund Citadel Investment Group disclosed it had taken a 5.3% stake in digital video recorder maker TiVo (Nasdaq: TIVO). Yes, that's the same TiVo that reported a loss per share that tripled from last year to $0.30 per share.
So what is Citadel doing buying a company that has issues up the wazoo? There are a few things Citadel may be thinking.
TiVo's IP is more valuable than anyone else thinks
TiVo is an intellectual property company if nothing else. The company has 196 patents issued and another 371 applications outstanding. And TiVo has been rigorously litigating competitors it thinks are infringing.
TiVo has patent infringement lawsuits outstanding with EchoStar (Nasdaq: SATS), Verizon (NYSE: VZ), AT&T (NYSE: T), and Microsoft (Nasdaq: MSFT), along with counterclaims outstanding for the last three. Not exactly a great list of enemies. But winning these cases can be lucrative, like when TiVo won a case against EchoStar in 2008, which paid out $104.6 million.
At the very least, Citadel must think the expense TiVo is incurring to prosecute and defend these cases will be worth it and there will be some upside in the future.
But as with any legal spat, there is downside risk. DISH Network (Nasdaq: DISH) is also suing TiVo in another patent infringement case. Citadel's lawyers must be pretty confident in the merits of all of these cases because litigation is getting awfully expensive and the opposition has very deep pockets.
Buying at the bottom
TiVo shares reached $10.97 earlier this year and after plunging to below $9, there must be some value to be found, right? On closer look, I'm just not seeing it. Price/sales is 4.8, price/book is 6.2, and earnings are negative, so P/E ratio doesn't tell us anything. None of those ratios are terribly attractive, and to top it off sales are falling, gross margin is declining, and both SG&A and R&D costs are on the rise. I'm not seeing any value here. In fact that's a case to short the stock, not buy shares.
And a turnaround doesn't seem imminent either. TiVo is losing subscribers and recently announced terms of a debt offering to pay for litigation, R&D, and other purposes. Taking out debt to sue rivals sounds more like a Hail Mary pass than a well-executed business plan.
Looking for a buyout
Of course, Citadel may think Apple (Nasdaq: AAPL) will take my suggestion to buy TiVo to pump up the Apple TV. At least that's this Fool's dream.
There could be some prospect of a buyout, but buying a money-losing company because you think it will be bought out is a risky proposition for investors without influence (aka you and me). Still, it isn't out of the question, and with IP more important than ever in the tech space, that may just be what Citadel is hoping for.
This is the most plausible reason I can find for Citadel to make such a big bet on TiVo.
Should we follow Citadel over the cliff?
As Mom always said, "Just because your friends jump doesn't mean you should." I don't know what Citadel's motivation is for this purchase, but I'm not seeing any flashing BUY signs here. Unless Citadel thinks there's a buyer waiting for TiVo, the patent litigation and worsening financials are enough to scare me away.
Would you follow Citadel and take the jump into TiVo? Leave your thoughts in the comments section below.
And be sure to add TiVo to My Watchlist to find all of our Foolish analysis on this stock.
