The world's top value investors love it when their best stock ideas are selling at bargain-basement prices. For those rarefied investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy one-get one" sale on their stocks.
Less than a year ago, InterDigital (Nasdaq: IDCC) was trading for more than twice the price it currently is, but a collapse in the perceived value of its patents has brought the wireless communications specialist low. Although it's bounced 54% from its nadir and seems to be on a comeback trail, you'll naturally want to do more due diligence before buying in. Still, this might be an opportunity to pick up a quality stock at a severe discount.
InterDigital Snapshot
| Market Cap | $1.5 billion |
| Revenues, TTM | $295 million |
| 1-Yr. Stock Return | (52%) |
| Return on Investment | 8.9% |
| Dividend/Yield | $0.40/1.16% |
| 52-Week High | $72.94 |
| Recent Price | $34.45 |
| CAPS Rating (out of 5) | **** |
Source: FinViz.com. TTM = trailing 12 months.
Let's just make sure there's nothing seriously wrong with it before you go and plug it into your portfolio.
It's all about the patents
The big run-up in shares that InterDigital enjoyed was, of course, launched when the consortium of companies paid beaucoup bucks for bankrupt Nortel's patent portfolio. When Google ended up spending $12 billion to buy Motorola for its patents, the race was on for any company with a portfolio that could be even tangentially related to mobile communications.
That provided a nice boost for not only InterDigital, which owns tens of thousands of such patents, but also for VirnetX Holdings (NYSE: VHC), which owns essential patents related to the security standards for 4G and LTE, and even AOL, which was able to raise much-needed cash by selling its patents to Microsoft for a cool billion dollars.
Sure, everyone with some intellectual property had stars in their eyes: Eastman Kodak thought it would be able to save itself from bankruptcy by auctioning off its portfolio, but the realization came too late that it would be cheaper for someone to buy them for pennies on the dollar in bankruptcy court than pay a premium for them on the market. Even now it's having trouble unloading them.
Yet InterDigital's portfolio is part and parcel of the whole mobile communications venue and should be worth a pretty penny regardless. Its problem was that after the deep pockets of Apple (Nasdaq: AAPL), Google, and Microsoft had had their fill, there weren't too many companies left with the wherewithal or desire to pay up for them. That led to InterDigital's collapse, and VirnetX, too, which saw its shares plunge from $42 a share down to just $11 each.
Both, though, have rebounded, with VirnetX up 142% from its lows and InterDigital a more modest 55% higher. The former had actually regained all its lost ground last month, only to see its patent infringement case against Apple stumble over a procedural issue. Still, a judge just slapped Apple with some onerous sanctions over its lawyer's conduct in the case that is probably going to be very damaging to its defense, which ultimately bodes well for VirnetX.
For its part, Apple won a high-profile case against Samsung over patent infringement, and InterDigital says this underscores and lifts the value of its own portfolio, which it's still trying to sell. In June it sold some 8% of its portfolio, or about 1,700 patents, to Intel (Nasdaq: INTC) for $375 million and is looking to sell off additional parcels. Analysts believe Apple, Samsung, and even Nokia (NYSE: NOK) would be buyers, particularly since InterDigital succeeded in blocking imports from the latter. With Amazon.com also in the market for patents to take on Apple, it can't be ruled out either.
At 22 times earnings and with its enterprise value trading at 27 times free cash flow, InterDigital isn't cheap by traditional standards, but because of the vast patent vault it maintains and operates as what some would consider a "patent troll," I don't think it can be measured using typical yardsticks, which is why I've rated it to outperform the market indexes on CAPS.
But let me know in the comments section below whether you think InterDigital ought to stand pat on its stock.
Have half a mind
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