OK, so this one’s a bit tricky. And not just because the clues are a bit limited. Don’t worry, we’ll still find an answer for you … but a caveat or two first …
Frank Curzio edits Phase 1 Investor, which is Stansberry’s “big ticket” newsletter that typically covers small tech, biotech and natural resources stocks — the kinds of small cap companies that can sometimes generate 90% losses or 500% gains very quickly. And it’s $5,000 for a subscription, so they’re obviously not getting an overwhelming number of buyers — but they do tease the stocks they pick in occasional “presentation” ads and we usually cover them when they do, and the stock very often goes up as a result.
Why? Well, because they’re getting hundreds of thousands of people excited about it, since they have access to the largest mailing lists in the investing world, but most of the folks who see the ad and get excited by the prospects of this “secret” stock won’t want to (or can’t) pay $3,000 (that’s what they usually offer as the “on sale” price) to find the stock. And rightly so — subscribe if you want to, it may be a fine letter, but never subscribe just to learn the name of a “secret” stock.
And so a certain (admittedly very small) number of those folks who saw the exciting ad will start searching far and wide for free information about this secret, and an (even smaller) group of them will find their way to the friendly shores of Stock Gumshoe and learn, after we sniff through the clues, just what the stock is. Or find it out on their own.
That last group, the folks who learn about it for free, is probably still teensy in the grand scheme of things … but it’s likely substantially larger and less-informed (about this stock) than the folks who actually shell out $3,000 as new subscribers this week to read Frank Curzio’s special report on the stock. (I haven’t asked them what the subscriber base is for Phase 1, I’m just guessing, but I know folks who read Curzio’s piece will be better informed than my readers because I’m just trying to give you the name, ticker, and some basic info so you can research it for yourself.)
And if even a small portion of that group, the folks who learn about the stock for free, are jazzed up enough by the promo language in the ad that they feel like they have to buy the stock immediately, it can jerk the share price up even if nothing’s happening with the company. And presumably, the folks who actually subscribe to Phase 1 have already bought their shares so they can see a little appreciation from this.
Which means that even though Curzio is probably being honest when he says he’s trying to keep it under wraps, there’s probably some delight in having this stock be more widely known after his subscribers have had a chance to buy.
So is that enough of a wet blanket for you? Sorry, I like to try to counteract the hype and optimism of the ad before I even tell you what they’re pitching — sobriety, patience and caution are often good qualities (and hard to come by for me personally). Ready to learn about the stock?
Curzio asks you to sign a “confidentiality agreement” that says you won’t share information about the idea if you choose to participate. I didn’t choose to subscribe and participate, thankfully, so I don’t even have to worry that I’m violating this dubious “agreement”. Imagine my relief. Here’s how they introduce the idea:
“Stansberry Research’s Newest BLACK BOX Opportunity
“A stock with such potential (100% to 200% gains), we can tell you almost nothing about it… and we’re asking readers to observe a strict confidentiality agreement through Jan. 1.”
I hate to admit it, but I was a little disappointed to see that — I guess I see so many promises of 1,500% gains and 10,000% gains that the boring old 100% or 200% just seems so humdrum now.
And the other thing that made me want to dig into this — other than the challenge of identifying a stock with very few clues — is that Curzio is again talking royalties. And I love me some royalties.
There are lots of ways to earn royalties … you can write something popular, invent something, own a valuable trademark or own property where oil or gold is found, etc. You can also buy and sell royalties, so there are a fair number of companies, mostly in biotech, natural resources, and technology, who own and invest in royalty-producing or possible royalty-producing assets.
The beauty of these kinds of companies is that they have low operational costs — they aren’t in business, really, they just take a cut of a business, so a few accountants and bookkeepers and lawyers ought to be able to man the show once you’ve got a few experts on board who can help you evaluate royalty-producing assets and buy and sell them. The owner of a royalty on a gold mine doesn’t worry over much that labor costs doubled last year, or that diesel prices are choking profits at the mine, he just collects his 1% (or whatever) of the gold that comes out of the smelter. There’s a downside to that passive position, too, in that you can’t tell the operator what to do or when to do it, and the mine could be shut down if costs rise too much, but in general the model is a delightful one for getting nice leverage on valuable assets without spending a lot of money.
I know that Frank Curzio and I have written about or suggested some royalty-based companies in common over the years — mostly in precious metals, including both Sandstorm Gold and Sandstorm Metals & Energy (both have been terrible of late, I still own the former) — so will we again be simpatico on a royalty company? Let’s see.
He does keep telling us about how he’s not going to spill any clues:
“I expect you could make 2 to 3 times your money – or more – on this investment, beginning on January 1, 2014, for reasons you’ll see in a moment. Of course, as with any investment opportunity, there are risks. And the risks are higher than normal here. But that’s why the profit potential is so incredibly high too.
“Just remember, I’m going to tell you almost nothing specific about the investment in this presentation, because we do not want to reveal the name of this stock to the general public.”
And he does hint at another stock that he recommended to his subscribers this year that sounds very much like big recent winner Ligand Pharmaceuticals (LGND) — which I also suggested to the Irregulars and which I’ve also been buying personally, though if he suggested it in May I was a couple months behind him. He notes that it’s too expensive to recommend at this point.
But then he gets into what few hints he will share about today’s “black box” secret stock:
“… in this case, the royalty model is a bit different…
“In short, this ‘black box’ opportunity allows investors to receive royalty income from some of the most valuable patents in the world….
“The Most Valuable Patent in America?
“In short, we recently found a tiny company that owns what is arguably one of the most valuable patents in the world.
“This patent covers a process that is used by billions of people each day and generates billions of dollars in revenue for some of the largest companies in America.
“Again, I can’t tell you the name of these companies… describe what this process is… or give you the name of the tiny firm who owns the patent to this process.
“But I will say that because of this single patent, this tiny company, which has a market cap of under $250 million, now likely collects tens of millions of dollars in royalties each and every year. One of our personal sources has said that this single patent has already awarded this firm $510 million in cash. To put that in perspective, that’s more than twice the value of the entire company right now.”
And it’s not just that “Most valuable patent in the world” that they own, apparently — here’s more from Curzio:
“… what very few people know about this company is that in addition to owning what is arguably the most valuable patent in the world, they also own over 500 additional patents that cover a wide range of inventions.
“And right now, this little company is in the process of securing additional royalties from several of these patents.
“The full details on how much money they will receive from these patents is expected to be announced sometime around January 1st.
“With these additional royalties – and the attention this will have the power to generate in the mass media – this tiny company’s stock will likely be worth much more than where it is today.”
Hmmm. Well, this part is going to be a bit self-serving as well, because though the clues are sparse I’m pretty sure I know what company he’s talking about … and I happen to have some call options on the stock in my own portfolio. The Mighty, Mighty Thinkolator tells me that our best match here is: Vringo (VRNG).
Vringo is one of the relatively new breed of companies that critics call “patent trolls” and fans call “non-practicing entities” or “intellectual property investors” — they buy, sell, file and improve on patent filings and, in some cases, do their own innovating to build new intellectual property, but aren’t really in the business of turning their patented processes and technologies into actual products or services. Then they figure out who is using that patented technology or process, and they ask for a royalty or take them to court.
And the “most valuable patent in the world” revolves around patents that Vringo acquired from Lycos and that date back 20 years or so, apparently the patents are for critical foundational technologies and processes that make search advertising work for Google (GOOG) as well as for Microsoft (MSFT) and the other search and internet advertising competitors. Vringo won a lawsuit last year against Google with a $30 million payday and an ongoing royalty on using the patent until it expires (which is just a few years away), and they also won a judgement against Microsoft a few months ago (they sued Microsoft not long after the ink dried on the Google trial), though the MSFT settlement was apparently disappointing.
Which is why I bought a few call options on the shares. I was halfway paying attention to VRNG over the past year or so, and never got really comfortable with the management or what they were going to end up doing, partly because I’m not a lawyer and I’d hate to invest much in the stock of any company that’s entirely reliant on “win or lose” legal decisions, but it did seem like there was the potential for a larger settlement or surprisingly large royalties or a purchase of the company by Google or another major competitor, or, of course, for something positive to happen with their other hundreds of patents. Buying call options lets me wager on that possibility while controlling how much I want to wager — and being willing to lose it all.
That’s not to say VRNG isn’t a real company or that it might not be a fine operator — I just don’t understand it well or have great insight into their legal strategies or the timeline (my options are for January 2015), and there remains the nagging suspicion that Google and Microsoft and the other huge companies they’d like to collect royalties from are pretty motivated to throw money at lawyers instead of at Vringo, dragging these cases on and fighting as much as they can. There’s a limit to how long they can fight, but I don’t know what the limit is or how it can be sidestepped.
But I’m pretty sure it is indeed VRNG that Curzio is teasing. Why? Because I think Curzio is probably listening to James Altucher, who is friendly with Porter Stansberry (Porter was helping him pitch his book a few months ago), and Altucher is a big booster of Vringo (or has been, at least) and could easily be the source of that $510 million number that Curzio teases. Altucher came up with that number as part of one of his articles about Vringo last year. At the time, he suggested a range of possible valuations for Vringo, from a “worst case” of $410 million to a “best case” of at least $2 billion.
Now, I could be wrong — the $510 million number Altucher came up with is based on Google paying royalties of $120 million a year until the patent expires, so $480 million, and then also paying the $30 million penalty assigned by the Jury. So it’s an exaggeration to say that “this single patent has already awarded this firm $510 million in cash” — that’s Altucher’s “medium case” scenario and it may well be plausible or even likely, but it’s not “in cash.”
But this is the best match I can come up with. Do your own research, there are plenty of folks who have given up on VRNG after the GOOG verdict failed to drive the stock to the moon and it began to appear that the settlement or royalties might continue to be fought in court, so the stock has actually been remarkably flat in 2013, mostly trading between $3-3.50. They do have about $40 million in cash and lots of patents on the books and the market cap is right around $250 million, but they’re not profitable and your guess is probably better than mine when it comes to figuring out how much they’ll get out of Google, and when.
Have an opinion to share on Vringo or other patent investments? Think the Thinkolator missed the target this time? Let us know with a comment below.
Oh, and in the interest of full disclosure: yes, I do own shares of Google too. And I won’t trade in my shares of GOOG or sell my call options in VRNG for at least three days per my trading rules. Actually, since the call options are likely to be bouncy since we’re talking about the stock here, I’ll be extra-fair and avoid selling them for at least a week to let any interest we stir up die back down — it’s my intention to wait longer than that to see how it plays out, since these are LEAP options for January 2015, but I promise to hold them for at least a week.