Patent Your Way to Potential Profits With This Small-Cap Standout

by Louis Basenese, Investment U’s Small Cap and Special Situations Expert
Tuesday, November 23, 2010: Issue #1394

In my last column, I shared three secrets for picking winning small-cap investments in this market. To refresh your memory…

• Focus on the technology sector. It’s been the strongest performer lately. And momentum is a market force that we want to use to our advantage.

 

• Look for “forever” growth trends. They’re immune to short-term swings in the economy and can help deliver profits no matter what’s going on in the world.

 

• Target stocks that Wall Street doesn’t follow. The market’s ignorance creates inefficiencies that we can exploit for maximum gains.

With that in mind, we’re going to move from theory to application. Specifically, that means showing you why InterDigital (Nasdaq: IDCC) represents a compelling buy…

I Just Called to Say… I Love My Mobile

When it comes to indispensable and compelling technologies, none can compete with mobile smartphones. If you have any doubt, go to your nearest Apple store when the company releases its next version of the iPhone.

In fact, we’re so enamored with our mobile phones – and their increasing functionality – that a recent Kelton Research survey reveals that 31% of people would rather give up sex for a year instead of their phones. Now that’s indispensable!

Whether or not you share such an extreme attachment, there’s no denying how darn useful mobile phones have become. And no matter what happens to the market in the months ahead, I guarantee it won’t derail our ever- increasing demand for this technology.

That’s where InterDigital comes in…

Patenting Its Way to Profits

To say InterDigital invented wireless technology is no exaggeration. After 37 years in business, its inventions are now used in every digital cell phone.

So why haven’t you heard of it, given such broad market penetration? That’s simple. The company doesn’t manufacture a single product. Instead, it sells “know-how.”

InterDigital’s business model is shockingly straightforward. It invests heavily in research and development. And once its engineers develop a breakthrough technology, an army of lawyers steps in to patent it and defend it vigorously.

The result? The company currently licenses patents for critical wireless technologies to the biggest players in the market, including Samsung, BlackBerry, HTC and Apple.

We’re not talking about a few patents here, either. At the end of 2009, InterDigital held 1,242 U.S. patents and 5,996 non-U.S. patents.

Even better, there’s no threat of this asset base being depleted. On the contrary, in fact… it keeps growing.

Last year alone, the company added 187 U.S. patents and 1,048 non-U.S. patents to its portfolio. Tack on the 10,213 patent applications currently in the queue and InterDigital is a patent factory.

Looming Bandwidth Crunch = Opportunity

What makes InterDigital particularly attractive now is the fact that management is dead set on being part of the solution to the bandwidth crunch.

As I mentioned here a couple of weeks ago, the amount of data being transmitted over mobile networks is exploding. In fact, Cisco estimates that by 2014, global mobile data traffic will be 39 times higher than current usage.

The only rub? Networks aren’t equipped to handle such a massive influx. Not even close.

Just ask any wireless industry insider and they’ll confirm: A bandwidth crunch is looming on the horizon, threatening to cripple any network caught with its pants down.

To a company like InterDigital, however, this isn’t a problem. It’s a gigantic profit opportunity. And management is attacking it from three angles:

• Creating technologies for spectrum optimization,

 

• Cross network connectivity,

 

• And intelligent data delivery.

Or, as the company puts it for us simpletons, “Bigger pipes, more pipes and better pipes.”

Once again, no matter what happens in the world or economy, nothing is likely to derail the need for more bandwidth. So InterDigital is positioned to capitalize on a truly “forever” growth trend.

No Mainstream Coverage? No Worries!

InterDigital’s unorthodox business model likely explains why no top-tier investment banks follow the company. That’s good news for us, though. This is essentially a virgin opportunity. And it’s a mighty attractive one, too.

A quick review of the fundamentals proves that InterDigital’s unique approach is paying off in spades…

• During its most recent quarter, sales increased by 22%, while profits jumped by 16%. Both beat expectations.

 

• Return on equity checked in at an eye-popping 73%. (Keep in mind, Warren Buffett considers anything over 15% attractive.)

 

• Management even decided to start paying a dividend, underscoring the company’s rock-solid financial position.

 

• InterDigital currently carries less than $1 million in debt and boasts over $560 million in cash (equal to almost $13 per share).

The best news? We can pick up shares of this under-the-radar technology company on the cheap. At current prices, the stock is trading for less than 10 times earnings. That’s a 38% discount to the average stock in the S&P 500 index.

And with such an attractive valuation, plus InterDigital’s extensive patent portfolio, I wouldn’t be surprised one bit if it received an unsolicited takeover offer.

Add it all up and I’m convinced that you’d be well served to consider picking up a few shares of this fast-growing technology company.

Good investing,

Louis Basenese

One Response to “Patent Your Way to Potential Profits With This Small-Cap Standout”

1. Dave DeWitt Says:
   
   November 24th, 2010 at 7:35 am

   This guy gets it! Well done!

   Reply

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