Tuesday, August 9, 2011

Time to panic? Or time to buy?

The DOW has erased all progress since the start of the year, 9 out of the last 10 days we have seen stocks (as well as most of our bank accounts) spiral downward. Given the double top pattern the DOW showed in the last month, I exited most of my positions before considerable damage was done. That said, for those who didn't it may seem like the time to take the hits you have and sell for a loss. I disagree. In the words of one of the most famous investors of all time you should be fearful when others are greedy and greedy when others are fearful. Right now, others are fearful. Bluechips are at a discount. Some offer attractive yields that when you figure into their price provide an even LARGER discount. So instead of taking your losses, why not buy more? Buying more shares reduces the overall price of the total shares you buy, similar to the dollar cost averaging strategy associated with DRIP investments. If you don't understand consider this, you buy 10 shares of stock A at $2 a share. The price has fallen to 1.50 a share and you consider selling. But if you instead buy 10 more shares, then now instead of 10 shares at $2 you have 20 shares at $1.75 a share. This strategy turns opposition into opportunity, and longterm will payoff. That said, here are the opportunities that I like from Mr. Market.

VirnetX (VHC: AMEX) - Virnetx is an Internet security software and technology company that is engaged in commercializing its patent portfolio by developing a licensing program as well as developing software products designed to create a secure environment for real-time communication applications such as smartphones, instant messaging, VoIP, eReaders and video conferencing. Their technology will provide security for 4g peripherals and their patent portfolio assures no one else will use their technology (without paying the price)/ Here's why I see this stock going very far up in the short term

  • VirnetX security technology was deemed essential for 4g accessories. That means ALL 4g items including iPhones (all models), iPads (all models), Androids, all tablets, anything that will run on 4g in the upcoming years (not too far away either) will have to have their technology. 
  • Their patent portfolio is strong and has allowed them to already sue and win their case against Microsoft (for 200 million) for infringement on 2 of their virtual protocol network patents. Their patent portfolio included over 48 U.S and global patents and continues to expand
  • They are in the process of suing Apple, Avaya, Cisco,  Mitel Networks Corporation, Mitel Networks, Inc., Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications, Inc. as well as others for similar charges. The court cases will be held in Texas where the Microsoft case was with the same judge and are expected to have the same outcome (no reasons have been given why there wouldn't be)
Yes it may be a bit risky to go with a company making the majority of its money from patent infringement cases but from current standpoint I feel VirtnetX has a lot more to gain then lose and I'm not the only one. Cowen Group is a financial services company that provides investment analysis and research as part of its services. They value VirtnetX at around 2.8 billion. Thats a huge some of money that will skyrocket this stock's worth. That doesn't include all the future royalties those companies will have to pay for products thereafter that use VHC's technology. Another potential cash flow from VHC is to be bought out  as its patent portfolio makes it an extremely attractive acquisition candidate.

My following pick is more conservative then VHC. I felt the need to diversify however I wanted stocks that at least provided a dividend but also have the opportunity for growth that due to market conditions were currently cheap. Here's what I found.

Telefonica (TEF: NYSE) Telefonica is a Spanish broadband and communications provider in Europe and Latin America. They have been around for over 90 years and owns around 80% of the market share in Spain but also have a strong prevalence throughout the continent. Here's why I like them:

  • After recently hitting their 52 week low due to crisis concerns in Europe the stock is cheap. The Spanish economy is weak but with TEF's ability to dive into other markets Latin America I feel they will continue to fuel their revenue for years to come. This combined with the increased adoption of mobile broadband in TEF's high end smart phones will drive market share improvement.
  • Brazil has the fifth largest market for mobile phone users, and TEF plans to invest over $14 billion into Brazil throughout the next three years providing them with an even larger prominence into a rapidly growing market.
  • TEF is able to get solid returns on its assets (8%), invested capital (11%) and equity (48%). Its ROE is higher then 92% of others in it's industry. 
  • The real deal maker here is the dividend. It boasts a 9.52% yield, and the company plans to give out around 1.60 Euros a share in 2011 and 1.75 in 2012. 
Telefonica is dedicated to paying its dividend and with its long history of consistently providing high dividends there is no reason to doubt their ability to. To get an idea of the return on TEF, here's a scenario buying 100 shares tomorrow at their price of 20.68 and hang onto the stock until 3 years. Keep in mind Telefonica pays 2 dividends a year and has already paid their first this year of .75 euros, so well calculate 1.60-.75=.85euros per share for the remainder of this year and keep the same dividend for year 3, and the first half of year 4.

Cost: (100*20.68)+10 for brokerage fees = $2078.00
Dividends paid at last half year 1 = 100*.85euros or 1.2 dollars =     120 dollars +
Dividends paid at end of year 2 =100*1.75 euros or 2.48 dollars =    248 dollars +
Dividend paid at end of year 3 = 100*2.48 dollars =                          248 dollars +
Dividend paid first half of year 4 = 100* .88euros or 1.25 dollars=    125 dollars
714 dollars is over 35% of the initial 2078 you first put in, meaning if this stock stands still (highly unlikely considering its growth opportunities) at the end of 2013 you will be closing in on recouping half of your initial investment and thats without any further increase in dividends or any special dividends it may pay. Something to think about for the long term investor.

No comments:

Post a Comment