Investing in patent trolls -- companies that aggressively and opportunistically sue larger companies for patent infringement -- has become a popular strategy with investors recently. After seeing Vringo's stock rise almost 250% in 2012, investors are eager for exposure to more patent enforcement cases. This has led them to bid up the shares of Parkervision 67% in the past three months.
Parkervision, based in Jacksonville, Fla., designs radio frequency technologies for use in wireless semiconductor circuits. Presently, Parkervision is engaged in a legal battle with Qualcomm over patent infringement, and some investors are seeing dollar signs. I'm less enthusiastic, especially after reviewing the history and financial metrics of the company. Below are four major red flags that investors need to consider before investing in Parkervision.
1. Cash burn
Parkervision generates no revenue and no profits. And, it's burning cash at an alarming rate. Over the past year, its operating cash was negative $13.4 million -- lawyers aren't cheap! At that rate of cash burn, the company will exhaust its current supply of cash in a year. If the company is to survive, it will need to raise additional capital, which leads into my second red flag.
Management treats the company's shares like toilet paper. According to Capital IQ, the company's weighted average shares outstanding were 8.7 million in 1994. As of its last 10-Q, the company has 82.9 million shares outstanding -- an increase of almost 10 times. In other words, if you owned 10% of the company 20 years ago, you'd own just over 1% of the company today. And, it's not like you'd have gotten a smaller slice of a bigger pie -- you'd have a smaller slice of a smaller pie.
3. Management's 20-year track record
Management, led by CEO Jeffrey Parker, has done a horrendous job of creating shareholder value over 20 years. The company has generated losses every year since 1993. It has never paid a dividend. Since its IPO 20 years ago, the stock has lost 50% of its value while the S&P 500 index advanced 237%.
4. Low CAPS rating
As Fool Brian D. Pacampara pointed out in September 2012, Parkervision received the dreaded one-star rating in Motley Fool CAPS, the Fool's free investing community. Over 100 All-Star Players have rated Parkervision, and more than 90% predict that it will underperform the S&P 500. Here's what member MMCapitalMgmt had to say:
Since 1993, the company has only lost money, both in the form of net income/earnings for shareholders and cash flow from operations. How is this company even in business? It consistently burns cash and contributes losses for shareholders. There isn't a possible way in which PRKR will not continue heading toward zero. By any valuation metric, the only value of the company is its existing assets.
Foolish bottom line
Parkervision has wantonly destroyed shareholder value over 20 years. The company has never been able to generate profits in the marketplace with its technology and patents. Now, management expects to monetize the patents via lawsuits. After reviewing the company's historical performance and management's track record, I'm very skeptical. I'd advise that Fools proceed with extreme caution.
2013 and beyond
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.
The article 4 Red Flags for This Patent Troll originally appeared on Fool.com.
Brendan Mathews is short shares of ParkerVision. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.