Wednesday, March 5, 2008

TSRA

Well TSRA dropped another 40% or something like that today. Another PTO rejection of patent claims and another huge drop. Doesn't make sense to me in that this is an initial action -- unless people figure the odds of the ITC appeal being successful just dropped -- that is possible.

Essentially some very large holders or a whole lot of medium sized holders have decided to sell and there was no one interested in buying. Do those that sold know something? nope. No one can at this point. TSRA has successfully litigated these patents several times and there is no new evidence being presented. It is absolutely stunning that what has worked every time before has all of a sudden been a complete failure.

What I mean is that investors do not believe the patents will survive challenge despite the fact that a court has ruled in their favor on the same evidence that the PTO is using to reject their patent claims -- generally you would think a court ruling would take precedence over the whim of a patent examiner but not so far. The ITC court has previously ruled that TSRA's technology represented a paradigm shift in packaging technology.

Regardless -- they have $5 per share in cash plus an annualized rate of free cash flow equal to $2 per share so figure 3 years (2008-2010) worth at that rate and then I guess the revenues disappear as the contracts and or current patents expire. That adds to $11 -- the bottom in the stock so far. Gives no value to the digital optics, which is NOT a subject of any litigation and is likely worth at least a couple of dollars per share of value.

Micro pilr -- no licenses but also no litigation -- if they can get customers to switch to this new technology, then the old patents won't really matter any more.

My understanding is that when the ITC judge ruled in favor of the stay the opposing lawyers (i.e. not TSRA's team) actually cheered -- they were just as surprised as anyone by the stay. The PTO starts by rejecting claims and then TSRA submits their evidence and things go back and forth until a final ruling is made and then TSRA can appeal to the courts -- this war is just getting started but the opposition has been more successful than they probably ever figured and have put tremendous pressure on TSRA's management. Believe me the team is feeling the heat from this huge stock drop -- it really shines a bright light on management and they must now operate under the assumption they have no credibility -- that impacts their ability to sell new licenses or defend their IP against anyone and everyone.

Many people buying the stock believe once the ITC rules in TSRA's favor or some other event happens -- perhaps the PTO rules in TSRA's favor just once -- people believe the stock will soar back to previous heights -- maybe but call me skeptical. I think its going to be a long hard road. It took 2 years for the stock to recover from the big decline of early 2005. Once a large number of shareholders -- stock traded HALF its shares outstanding today -- have lost a bunch of money and sold near the lows, they don't come back -- its emotionally too difficult. It takes time for the company to attract new investors and they will now have to convince people to trust their IP again. that will be difficult and will likely mean a lower multiple for TSRA in the future.

I still believe TSRA will prevail ultimately -- its not like much new news came out today other than the stock price dropping to levels that can be justified under almost any scenario.

of course as you read this note there are probably thoughts coming to mind about me being in denial and going through the stages of loss (think grieving) no doubt its true. I had a tough day but I went ahead and added to my position -- almost doubled it. Was that rational? depends -- if I still believe in the story then you have to buy more at these prices. At a low teens valuation you are not really paying for patents anymore just cash on hand and the existing contracts. Was my buy emotionally based -- oh yea. We'll see how well it works out -- but I suspect its going to be a long road ahead -- think 2 years to resolution by which time most current investors or those that have sold the last couple of weeks will have long lost interest.

I sold some GOOG and some MSFT to buy more TSRA -- I still belive in GOOG but its a big company and that has to impact its growth at some point relative to a smaller company. I just thought TSRA offered much greater opportunity. If I had more MSFT, then I would have just sold that and not bothered with the GOOG but alas I needed more funds to rebuild the TSRA position -- thank goodness I didn't buy last week in the 20's -- let's hope next week I'm not saying wish i hadn't bought in the teens.....

I also doubled up on DFR with the idea that I will sell these shares in a month to recognize the losses.

I am really excited about DFR's potential but so far I have been as wrong as possible on that stock. I have thoughts on the entire financial sector but not tonight.

2 comments:

been there said...

Kyle--it is often dangerous to think that you can figure out a recent event better than the market. A major event like that which has just happened with TSRA gets alot of attention by everyone. The short of it is that I don't know and you don't know about the patent situation. Sure it is probably now a value stock but you also have a VESTED INTEREST in the stock because it is down so much. I have found it is better to sell as soon as I think that something has changed so that my original reason for owning the stock is a question. The tax loss is useful and there is no rule that you have to make up the money you just lost in the stock in which you just lost it.
good luck

Anonymous said...

Kyle, while I do not have the specific industry knowledge enabling me to judge an investment in TSRA or DFR, I am quite familiar with the situation you seem to be facing just now: The freefall of a large position in one's portfolio. My nemesis was the biopharmaceutical company Elan (ELN) in early 2003, when it fell over a cliff from 60 USD. I bought all the way down to 1.75 USD(not doubling , but quitupling the shares, or whatever). Finally I averaged at about 9 USD. A wrecking experience, when the stock is at 1.75! Fast foreward: the stock went back up to >25. All is well that ends well? Unfortunately not. After doing some "due diligence" on my protfolio I decided to cut the losses on the way up (somewhere at 6USD) and sold three fourth of my holding. While I benefited from the subsequent rise in the share price, the investment, altogether, was a loosing one. Instead of reaping a >150% profit I lost, because I sold too early. Morale of the story: Sit through? Not necessarily so. Doing the postmortem on my investment-case I made several errors: 1) I committed too much money into a stock with too many unknowns and too many unpredictable moving parts.
2) When accounting errors and surfaced and an Alzheimer trial was halted, I added to my position, all the more, the lower it fell. (It somehow feels good if you double down on a loosing position: at least there is some action...). But did I really understand the risk involved with company at that specific moment? I'm afraid, no.
3) I decided to cut my losses when the stock price was low. Another stupid error? Nope, again. It was probably the only reasonable decision, since I came to realize that I might own a small position, but surely not muchos dollaros in a stock with so many unknown part, and with such a poor risk profile. Ironically, the only decent investment decision was the one preventing me from turning a loosing position into a winner!
4) I kept to my remaining shares and let it run, especially when the story became brighter again, and I sold the rest at the top. Here, at least, I had my eyes on the ball...;
As to your investment: it all boils down to the question: how much do you know about patent litigations, how sure are you of your calculation on the fair value to the company assuming a worst case scenario, and finally how much money do you want to spend on a stock with the specific risk profile of TSRA (as assesssed by yourself)? Or, in other words, if you did not own any shares of
TSRA now, what percentage of your portfolio would you be willing devote NOW to TSRA? Do you, then, have to trim your position, or , rather, add to it?

regards

Dr. John

PS: As to BLUD, I follow it loosely, but don't own it. worth being researched more, but lack of time these days....