I'll admit it...
There are times when I select stocks and funds to buy based on the historical track record of the managers in charge.
From time to time, I’ll invest in a stock not because I feel that I can tell that a stock is especially undervalued, but because the most accomplished people in that specific industry have jumped on the opportunity.
And right now I'm very interested in a little-known investment opportunity that has caught the attention of some of the biggest names in its industry (and the world).
In fact, along with a couple of legendary CEOs, a handful of the planet's most powerful companies have a lot of skin in the game when it comes to the fortune of this tiny company...
Spherix Incorporated (SPEX) is an intellectual property (IP) company where the main course of business is maximizing the value of the patent rights that it owns. In short, Spherix focuses on collecting royalties from companies that have not been paying to use certain patents that Spherix recently acquired.
The company has been around for years, but its current form was just assembled in mid-2013, when it entered the IP business. This is an old company with new shareholders, new management, and a new game plan.
And that makes it a new opportunity for investors.
Now, I’ll be straight up with you. I do not have the expertise to figure out what the Spherix patent portfolio is worth. But what I can do is observe what other much smarter people are doing, and take my cues from them.
And I have to say, the patents that Spherix has assembled in the last year have attracted some highly successful parties. Or more accurately, some very accomplished intellectual property operators have assembled an interesting patent portfolio for Spherix.
Interesting Party #1 – CEO Anthony Hayes
How does a rich man decide which company to work for? I think the answer is pretty simple... a rich man chooses the company that offers him a chance to get even richer.
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Anthony Hayes joined Spherix in the summer of 2013. And I don’t think he is with the company because he needs a paycheck. I think he's there to make a lot of money through the Spherix shares he owns.
Hayes has an astounding recent track record when it comes to monetizing the value of patent portfolios as demonstrated by his last three ventures.
Case 1 – Hayes was brought in to evaluate the patent portfolio of a company facing bankruptcy. Hayes created a special investment vehicle to purchase and resell the patent portfolio. The special investment vehicle raised funds from investors who were rewarded with returns of 600% in 9 months when the final patents were sold.
Case 2 – Hayes indentified an underappreciated intellectual property that was being spun out of an operating DSL communication company. Hayes believed that value could be extracted by licensing the patents to companies infringing on the patent. Over two years Hayes oversaw a licensing (and litigation campaign) that resulted in a return of 495% on the initial cost of the patents.
Case 3 – Hayes was retained by a financially distressed publicly traded company (Mango Capital) to monetize its intellectual property. Hayes restructured the company, packaged its intellectual property and successfully sold it. Prior to his involvement, shares of this company traded at $0.07 per share. After the sale, the company was able to pay a dividend to shareholders of $0.34 (five times the earlier share price).
I’d jump at the chance to invest alongside a fund manager with a similar track record. Why shouldn’t I similarly be interested in Hayes?
Interesting Party #2 – Board Member Alexander Poltorak
On October 29, 2013 Spherix announced that Alexander Poltorak had joined the Board of Directors.
Poltorak is the Founder, Chairman and the CEO of General Patent Corporation which is the oldest intellectual property firm in the world.
Poltorak isn’t just a useful guy to have around if you are an intellectual property company. He is perhaps the most useful guy in the world that you could have. He has more experience than anyone else on the planet in this field, and he has written several books on the subject.
Poltorak is a pioneer in this industry and has looked at more patents than almost anyone over the past couple of decades.
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He has spent his working life focused squarely on the intellectual property business, and his decision to join Spherix is another strong indication (in my opinion) of the quality of the company's portfolio.
Interesting Party #3 – Rockstar Consortium
In the summer of 2013, Spherix announced that it had entered into a transaction with the Rockstar Consortium. The consortium is jointly owned by none other than Apple (AAPL), Microsoft (MSFT), BlackBerry (BBRY), Ericsson (ERIC), Sony (SNE) and EMC Corporation (EMC).
The transaction with Rockstar involved Spherix gaining ownership of a group of mobile communications patents. In January 2014, Spherix topped that up by acquiring an additional 100 patents from Rockstar.
As consideration for these patents, the Rockstar Consortium accepted shares of Spherix (instead of cash) as well as a share in future profits from these patents. Today, Rockstar owns 28% of Spherix and if the share price heads back up to $20, the consortium will own almost 50% through other vested shares.
I like that Rockstar wanted an equity stake in Spherix and also a future interest in profits from the patents. That means this isn't a transaction where Rockstar is washing its hands of these patents. Rather it appears to be a situation where Rockstar is turning the patents over to Spherix who is highly motivated to extract value from them.
For Spherix it is a huge advantage to be able to turn to the deep resources of Apple, Microsoft, et al, if it needs some help. That's something you wouldn't expect a company the size of Spherix to have.
The First Big Opportunity Here...
In March of 2014, Spherix filed a lawsuit against Cisco Systems (CSCO) for the infringement of 11 patents Spherix acquired in the Rockstar transaction. These patents originally belonged to the now bankrupt Nortel Networks.
Spherix alleges that the patent infringement by Cisco applies to a "vast majority" of Cisco's more than $43 billion in sales of routers and switches in the United States over the five years ended July 27, 2013.
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What would winning this case do for Spherix's bottom line?
On a fully diluted basis Spherix has a market capitalization of around $70 million dollars. That figure is obviously dwarfed by the $43 billion in revenue Spherix thinks it is entitled to a major piece of.
You can see there is big potential here for Spherix to make a windfall of money, if the cards fall the right way. But will they?
It's apparent to me that a lot of very smart people have accumulated a financial interest in this company because they believe it can make them a lot of money.
Simply put, Spherix isn’t an opportunity that is based on current cash flows, or assets, or any other fundamental metric. It is an opportunity to piggyback on talented, and highly successful, individuals.
Risks to consider: Spherix has no current cash flows so this completely a bet on monetizing value from its sizable (and intriguing) patent portfolio. The size of the prize and the parties involved make Spherix interesting, but the fact remains that these patents could turn out to be completely worthless if the courts don't rule in Spherix's favor. Also, this company has a tiny float of outstanding shares, so the stock price is likely to continue to be volatile.
Action to take --> Buy a few shares of Spherix with your "fun" money. If this company works out even a small bet can turn into a tidy sum.