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IP Plays With Operating Businesses And Recent Insider Buying Sep 16 2013, 10:28 | about: DSS, OTIV There are numerous reasons for insiders to sell stock ranging from raising capital to pay taxes, paying a child's tuition, diversifying a portfolio, and anything in between. However, the reason for buying stock is because you have a belief that the stock is undervalued and that it will be higher in the future. Insiders should have the most up to date information on their companies and should have great knowledge of the company. Insider buying is certainly not a sure fire way to estimate the direction of stock, but it is certainly something that should be taken into consideration.
OTIV provides SmartID Solutions, Payment Solutions, and Petroleum Services. Most of OTIV's products are based on what they call the OTI Platform which consists of their patented technologies encompassing their smart cards, smart cards readers, and software to support their customizable systems. OTIV has a pending court case in the United States District Court in the Southern District of New York against T-Mobile USA (TMUS) involving patents relating to near field communications. OTIV had a successful Markman Hearing and you can find out more about OTIV's Markman Hearing victory here.
While I like the upside that the patent infringement suit may bring, I really like the growing operating business. With new CEO Ofer Tziperman, new management, and a more focused direction, the company has delivered positive 2nd quarter results. Revenues grew 19% year over year to $9.2 million for the quarter, while expenses declined 8% year over year. The company is putting more of a focus on their payment products and the increase in revenue was highly attributable to a 94% year over year increase in payment product revenues from NFC readers sold to the U.S. Market. OTIV announced a cash balance of $9.7 million, but that did not include the $10 million sale of their SmartID Division which will come at the close of this transaction (also not included is the additional payments that may be received if certain milestones are reached).
With the all of the positives stated above, my positive outlook on the company is furthered by the directors of the company buying stock. The directors of OTIV have recently purchased 735,000 shares on the open market. With the upside potential of what the lawsuit against T-Mobile may bring, the positive operating results, and the insider purchases, I believe OTIV is undervalued and a buy.
DSS provides counterfeit and fraud protection along with authentication technology. With their merger with Lexington Technology Group, DSS now provides products and services as listed above along with an IP monetization and licensing strategy. DSS currently has three settlement agreements with Novell (NOVL), BroadVision (BVSN), and Jive Software (JIVE), and there are two Defendants remaining in Facebook (FB) and LinkedIn (LNKD). You can read more about the filed suits here.
The share price in DSS has fallen from a recent high of $3.64 to current levels of $1.28, even reaching a 52 week low of $1.08. There have not really been any significant events to explain this rapid decrease in share price. I believe DSS is oversold from these conditions and presents a great buying opportunity. Management explained that they believe the drop in share price was due to investors who the company partnered with before the merger even took place. Management believed there were incentives in place to keep investors with a long term focus. DSS Management stated in their Earnings Call the following:
Incentives included nearly 5 million warrants with an exercise price of $4.80 and 7.1 million escrow shares to be delivered to the LTF shareholders only if certain conditions were met, including a sustained share price above $5. [This was] put in place to focus shareholders on longer term prospects of DSS and we felt all parties to the merger shared. We believe trading since the close of the merger has been originating in large part from investors who we partnered with originally, but who are now capitalizing on their own short term opportunities in the market, while ignoring what we believe, and continue to believe they saw together with us a significant longer term benefits of the merged company.
I believe that this heavy selling pressure is pretty much done and the price will recover to higher levels. My belief and management's statements are backed up by actions by insiders. Just recently on September 12, 2013, the President of DSS Robert Bzdick purchased 50,000 shares while the Chairman of the Board Robert Fagenson purchased a total of 5,000 shares over the same two day period. The actions of these two insiders reinforce my belief and their own statements that the share price has fallen even though the long term prospects still look bright.
Besides the selling by the early investment partners, another reason for the drop in share price may be caused by the delay in the suit with Facebook and LinkedIn. The Markman Hearing was originally scheduled to take place on October 2, 2013, but it has since been pushed back to February 26, 2014. While the delay is unfortunate, it is important to remember that the time delay will not impact the chances for success at all. Now that the Markman Hearing has a new date, more certainty exists and the run-up until the Markman Hearing causes another catalyst to lift the share price.
Conclusion
Two IP plays that I like as part of the speculative portion of my portfolio are OTIV and DSS. Both companies have growing operating businesses and lawsuits that provide tremendous potential upside. I believe the true value of OTIV with new management has yet to be realized and that DSS is oversold. At the very least, new investors should look further into OTIV and DSS to see what these insiders are buying. Additional disclosure: The information contained herein is for informational purposes only. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal. |