Could Someone Research This Angle
 

A small company that has a lot of its eggs in one basket is being severely distracted by a patent infringement lawsuit and goes on to win the case. Either as a plaintiff or defendant. Obviously the stock goes up when it wins. But in the two cases I have had positions in, Immersion (plaintiff) and even more so (so far) Shufflemaster (defendant), it continued to go up a lot more. Also when the loser is a small company (eg Mikohn) the opposite may be the case.

So i'm wondering if the simple technique of buying or shorting one of these companies after the verdict is in would have worked in the past as a general rule.

Re: Could Someone Research This Angle
 

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A small company that has a lot of its eggs in one basket is being severely distracted by a patent infringement lawsuit and goes on to win the case. Either as a plaintiff or defendant. Obviously the stock goes up when it wins. But in the two cases I have had positions in, Immersion (plaintiff) and even more so (so far) Shufflemaster (defendant), it continued to go up a lot more. Also when the loser is a small company (eg Mikohn) the opposite may be the case.

So i'm wondering if the simple technique of buying or shorting one of these companies after the verdict is in would have worked in the past as a general rule.

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why would you like to know whether this strategy would have worked in the past?

Barron

Re: Could Someone Research This Angle
 

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So i'm wondering if the simple technique of buying or shorting one of these companies after the verdict is in would have worked in the past as a general rule.

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I'm not familiar with the case you mentioned, but the market often discounts news like this. Unless the verdict was a complete surprise, it would have already have been priced into the stock.

I feel a stock's reaction to new is a better indicator for longer-term investors than a specific short-term play.

Trading on news can be profitable for nimble currency traders, but for retail traders you're usually far too late to make any low-risk profits.

Having said that, you may have an edge if as in your case it is a small/micro-cap stock that you might have been obsessively following.

Re: Could Someone Research This Angle
 

There is too much going on with patent lawsuits to make a generalization about them. Were they expected to win? How much does the win add to the bottom line? Does the other side now pay a royalty or stop selling the product altogether? Do they collect in cash or something else? Will the other side contest it and drag out the judgement so it take 10 years to get what you won? What's the likelihood the judgement is appealed?

In this case, the more important factor is whether the story is sexy or not. Card shufflers? BZZZT. Sorry, not sexy. Most people don't give a crap whether cards get shuffled by hand or by machine. Talk memory chips a la Rambus, or pager email a la Blackberry and you got sexy.

Re: Could Someone Research This Angle
 

You guys are not exactly getting the point. Firstly it doesn't matter much whether the outcome is a surprise. Because I am talking about the performance of the stock AFTER the verdict. Secondly that performance need not be directly related to the product under litigation. Rather it is related to the fact that they no longer have to concentrate lots of time and energy on the lawsuit. (Which might mean that the losing side is not a good short.) I'm wondering whether the market would, on average, underestimate the positive effect this freeing up of resources has on a company. They certainly did when it came to Shufflemaster winning the suit that Mikohn brought against it.

Re: Could Someone Research This Angle
 

One of the reasons spinoffs can be very good investments is because they used to be a small part of a big organization and probably not a very important part; once they are spun off that unimportant business becomes the most important thing in the world to the people running it and the business will often perform much better than it has historically.

Wouldn't be surprised if there is a similar affect when talking about managements that are previously distracted by big lawsuits.

Re: Could Someone Research This Angle
 

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A small company that has a lot of its eggs in one basket is being severely distracted by a patent infringement lawsuit and goes on to win the case. Either as a plaintiff or defendant. Obviously the stock goes up when it wins. But in the two cases I have had positions in, Immersion (plaintiff) and even more so (so far) Shufflemaster (defendant), it continued to go up a lot more. Also when the loser is a small company (eg Mikohn) the opposite may be the case.

So i'm wondering if the simple technique of buying or shorting one of these companies after the verdict is in would have worked in the past as a general rule.

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There is no general rule. This is finance and investing. Read that Black Swan thing.

Re: Could Someone Research This Angle
 

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You guys are not exactly getting the point. Firstly it doesn't matter much whether the outcome is a surprise. Because I am talking about the performance of the stock AFTER the verdict. Secondly that performance need not be directly related to the product under litigation. Rather it is related to the fact that they no longer have to concentrate lots of time and energy on the lawsuit. (Which might mean that the losing side is not a good short.) I'm wondering whether the market would, on average, underestimate the positive effect this freeing up of resources has on a company. They certainly did when it came to Shufflemaster winning the suit that Mikohn brought against it.

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In a lawsuit is the CEO of shufflemaster devoting serious time to the lawsuit rather than the company? I wouldn't think he would be.

I would say for small companies it may have an impact. For large companies it would have zero impact.

Re: Could Someone Research This Angle
 

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You guys are not exactly getting the point. Firstly it doesn't matter much whether the outcome is a surprise. Because I am talking about the performance of the stock AFTER the verdict. Secondly that performance need not be directly related to the product under litigation. Rather it is related to the fact that they no longer have to concentrate lots of time and energy on the lawsuit. (Which might mean that the losing side is not a good short.) I'm wondering whether the market would, on average, underestimate the positive effect this freeing up of resources has on a company. They certainly did when it came to Shufflemaster winning the suit that Mikohn brought against it.

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In a lawsuit is the CEO of shufflemaster devoting serious time to the lawsuit rather than the company? I wouldn't think he would be.

I would say for small companies it may have an impact. For large companies it would have zero impact.

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Exactly. Maybe if it's a little pissant company with 8 people in it, it's a big deal. Otherwise, not. Researching patent lawsuit results on companies like that would probably be a waste of time, because there won't be very many.

Re: Could Someone Research This Angle
 

There are alot of informational effects that the market appears to not correctly value immediately. I came across a study that in the past 30 years one could have made abnormal returns by buying companies which gave positive signals to the market such as dividend increases or stock buyback and shorting the opposite signals. Your example is pretty similar to those types of actions. But the thing is just because those trends occured in the past is no indication that those trends will continue in the future, especially since it is widely known by the time you know.

Re: Could Someone Research This Angle
 

All I know so far is that you guys are guessing and are as lazy as I am.

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All I know so far is that you guys are guessing and are as lazy as I am.

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Can I just clarify that you want someone here to research historical correlation between stock price and something as varied and esoteric as patent lawsuit decisions?

Re: Could Someone Research This Angle
 

yes

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yes

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Weird that it doesn't seem to be happening.

Re: Could Someone Research This Angle
 

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yes

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Weird that it doesn't seem to be happening.

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LMAO! Evan I take back all the bad things I ever said about you... ok I take that back too... I take back half of the bad things I ever said about you.

Re: Could Someone Research This Angle
 

I dont know how much bearing the lawsuit has regarding the status of these companies or how much traditionally the average SP goes up or down regarding an outcome..but you could more safely run a Call or Put through on both companies assuming you expected the outcome of the verdict to favor one company(call on one , put on the other). That would hedge your potential losses instead of straight shorting.
Not my area of expertise though.

Re: Could Someone Research This Angle
 

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All I know so far is that you guys are guessing and are as lazy as I am.

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Wrong again. What I posted is a result of trading and following patent lawsuit plays like RMBS and RIMM and others. Simply finding lawsuit plays and finding what the stocks did afterwards is useless for the reasons I stated above. There are far too many variables surrounding lawsuits for anyone to conclude that the stock action is based on the lawsuit ending alone. So then you'd have to filter out the companies that were of any size to meet your criteria. The resulting sample size would be tiny. Then you'd have to research the circumstances around the lawsuit. After all that, I doubt you'd have more than a few examples, and making a conclusion that their stock action was due to "freeing up" of resources would be ridiculous.

Re: Could Someone Research This Angle
 

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All I know so far is that you guys are guessing and are as lazy as I am.

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Wrong again. What I posted is a result of trading and following patent lawsuit plays like RMBS and RIMM and others. Simply finding lawsuit plays and finding what the stocks did afterwards is useless for the reasons I stated above. There are far too many variables surrounding lawsuits for anyone to conclude that the stock action is based on the lawsuit ending alone. So then you'd have to filter out the companies that were of any size to meet your criteria. The resulting sample size would be tiny. Then you'd have to research the circumstances around the lawsuit. After all that, I doubt you'd have more than a few examples, and making a conclusion that their stock action was due to "freeing up" of resources would be ridiculous.

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Why are you using the term "stock action"? Did you realize that my hypothesis involves the actual earnings of the company a couple of years down the road?

Re: Could Someone Research This Angle
 

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All I know so far is that you guys are guessing and are as lazy as I am.

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Wrong again. What I posted is a result of trading and following patent lawsuit plays like RMBS and RIMM and others. Simply finding lawsuit plays and finding what the stocks did afterwards is useless for the reasons I stated above. There are far too many variables surrounding lawsuits for anyone to conclude that the stock action is based on the lawsuit ending alone. So then you'd have to filter out the companies that were of any size to meet your criteria. The resulting sample size would be tiny. Then you'd have to research the circumstances around the lawsuit. After all that, I doubt you'd have more than a few examples, and making a conclusion that their stock action was due to "freeing up" of resources would be ridiculous.

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Why are you using the term "stock action"? Did you realize that my hypothesis involves the actual earnings of the company a couple of years down the road?

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you realize this requires a fairly large amount of work, right? i mean not only do you have to find companies that have had litigation against & for them, you have to look at their situation at that time & in the recent past to get a sense for their legal position. you also have to dig into what you'd expect the effect of the lawsuit to be on their business & then test that hypothesis among as large a sample as can be gathered effectively.

thats a time consuming & leg work involved request that, save me getting my own intern, i don't think i'll be able to help you with.

overall though i think it is an interesting angle in terms of understanding more about the market in order to be more informed to analyze future picks. however, i dont think it woudl be useful to apply as a trading strategy on its own even if the historical research proves compelling.

Barron

Re: Could Someone Research This Angle
 

It would be a good thesis paper for someone getting their PhD in finance

Re: Could Someone Research This Angle
 

How much are you planning to pay for this research?

Re: Could Someone Research This Angle
 

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A small company that has a lot of its eggs in one basket is being severely distracted by a patent infringement lawsuit and goes on to win the case. Either as a plaintiff or defendant. Obviously the stock goes up when it wins.

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This is, of course, an untrue assumption.

Re: Could Someone Research This Angle
 

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A small company that has a lot of its eggs in one basket is being severely distracted by a patent infringement lawsuit and goes on to win the case. Either as a plaintiff or defendant. Obviously the stock goes up when it wins.

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This is, of course, an untrue assumption.

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Apparently David has never heard the phrase "Buy the rumor, sell the fact."

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A small company that has a lot of its eggs in one basket is being severely distracted by a patent infringement lawsuit and goes on to win the case. Either as a plaintiff or defendant. Obviously the stock goes up when it wins.

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This is, of course, an untrue assumption.

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On average? Wanna bet?

Re: Could Someone Research This Angle
 

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A small company that has a lot of its eggs in one basket is being severely distracted by a patent infringement lawsuit and goes on to win the case. Either as a plaintiff or defendant. Obviously the stock goes up when it wins.

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This is, of course, an untrue assumption.

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On average? Wanna bet?

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This is an entirely different statement.

Re: Could Someone Research This Angle
 

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A small company that has a lot of its eggs in one basket is being severely distracted by a patent infringement lawsuit and goes on to win the case. Either as a plaintiff or defendant. Obviously the stock goes up when it wins.

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This is, of course, an untrue assumption.

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On average? Wanna bet?

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rofl_copter at your furious backpedaling. "Of course it goes up." Game, set, match.

Even if 4 went up for every 1 that dropped, if it went +10, +10, -40, +10, +10, there's no 'alpha' there.

Re: Could Someone Research This Angle
 

DS,

If Naj won't take all of your square action, I'd like a piece also. Please try not to rephrase all future statements into entirely different ideas than originals. K thx

Re: Could Someone Research This Angle
 

i may be missing the forest for teh trees here but in what scenario would a small business stock not go up in the situation described by DS?? aka, a small company has a valueable idea that is huge to the company and it is either defending or prosecuting that idea in court. eventually the verdict comes out in favor of the small company... what would cause the price of that company's stock to drop as a direct result of the favorable ruling?? [img]/images/graemlins/confused.gif[/img]

Barron

Re: Could Someone Research This Angle
 

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i may be missing the forest for teh trees here but in what scenario would a small business stock not go up in the situation described by DS?? aka, a small company has a valueable idea that is huge to the company and it is either defending or prosecuting that idea in court. eventually the verdict comes out in favor of the small company... what would cause the price of that company's stock to drop as a direct result of the favorable ruling?? [img]/images/graemlins/confused.gif[/img]

Barron

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Unless the ruling is a suprise it should already be factored into the price. The same way with results of Clinical Trials. Phase III results on average result in a drop in share price.

Re: Could Someone Research This Angle
 

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i may be missing the forest for teh trees here but in what scenario would a small business stock not go up in the situation described by DS?? aka, a small company has a valueable idea that is huge to the company and it is either defending or prosecuting that idea in court. eventually the verdict comes out in favor of the small company... what would cause the price of that company's stock to drop as a direct result of the favorable ruling?? [img]/images/graemlins/confused.gif[/img]

Barron

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If the market had expected, and priced in, an even more favourable ruling then was received.

Re: Could Someone Research This Angle
 

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i may be missing the forest for teh trees here but in what scenario would a small business stock not go up in the situation described by DS?? aka, a small company has a valueable idea that is huge to the company and it is either defending or prosecuting that idea in court. eventually the verdict comes out in favor of the small company... what would cause the price of that company's stock to drop as a direct result of the favorable ruling?? [img]/images/graemlins/confused.gif[/img]

Barron

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Unless the ruling is a suprise it should already be factored into the price. The same way with results of Clinical Trials. Phase III results on average result in a drop in share price.

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i thought about the clinical trials thing, however, i dont see how a ruling would be estimated like that. maybe i just haven't lived through or seen/heard of enough of them to get that sense.

Thanks,
Barron

Re: Could Someone Research This Angle
 

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i may be missing the forest for teh trees here but in what scenario would a small business stock not go up in the situation described by DS?? aka, a small company has a valueable idea that is huge to the company and it is either defending or prosecuting that idea in court. eventually the verdict comes out in favor of the small company... what would cause the price of that company's stock to drop as a direct result of the favorable ruling?? [img]/images/graemlins/confused.gif[/img]

Barron

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If the market had expected, and priced in, an even more favourable ruling then was received.

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yea i think thats the right answer in short. thanks,
Barron

Re: Could Someone Research This Angle
 

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i may be missing the forest for teh trees here but in what scenario would a small business stock not go up in the situation described by DS?? aka, a small company has a valueable idea that is huge to the company and it is either defending or prosecuting that idea in court. eventually the verdict comes out in favor of the small company... what would cause the price of that company's stock to drop as a direct result of the favorable ruling?? [img]/images/graemlins/confused.gif[/img]

Barron

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If the market had expected, and priced in, an even more favourable ruling then was received.

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QFT, or even an 'equivalent' ruling. If the equity falls to a 'market return' Beta, the current holders may be seekers of higher Beta/[alpha as well] stocks and not be interested in holding a stock that will only return = the market. Etc.

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i may be missing the forest for teh trees here but in what scenario would a small business stock not go up in the situation described by DS?? aka, a small company has a valueable idea that is huge to the company and it is either defending or prosecuting that idea in court. eventually the verdict comes out in favor of the small company... what would cause the price of that company's stock to drop as a direct result of the favorable ruling?? [img]/images/graemlins/confused.gif[/img]

Barron

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If the market had expected, and priced in, an even more favourable ruling then was received.

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QFT, or even an 'equivalent' ruling. If the equity falls to a 'market return' Beta, the current holders may be seekers of higher Beta/[alpha as well] stocks and not be interested in holding a stock that will only return = the market. Etc.

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i think you may have drifted over my head here.

take me through this proces real quick.

so a biotech stock price is at $50/share. it has been trading on the NYSE for 10 years. this company has never been involved in litigation before. it is estimated that the beta for this stock is 1.5 based on historical monthly returns vs. the mkt. 1yr ago the company got involved in a lawsuit relating to its blockbuster product accounting for 70% of its sales. lets say there are 5 states of the ruling that comes out tomorrow.

1) more highly favorable
2) more favorable
3) identical to what was priced in
4) more unfavorable
5) more highly unfavorable

how would the beta change from 1.5 in each of those cases, and why?

before answering, could you explain how there is even an answer to that?? the way i understand it (and i could easily be wrong here), the beta is a historical measure that is supposed to look at the returns of this security vs. the mkt and the extent to which it is riskier, the security's beta increases. so an event occurs and the theoretical beta changes, right?

but the actual beta (estimated by regressing the excress returns of that stock vs. the excess mkt returns) can't change immediately. so now, people who use the CAPM approach to stock valuation utilize some new beta to arrive at the discount rate of the firm? and everybody just guesses at it?

so these facts lead me to believe that the change in beta is simply theoretical and results from logical analysis. in turn, here's how i'd guess at the answers i asked you for:

1) beta should either increase or decrease. Increase: people who were awaiting a ruling to invest will now buy, increasing price & volatility. Decrease: earnings are no longer as questionable and the stock could be less risky now than it was prior to this ruling.

2) beta should increase or decrease, though by not as much as 1). i can see logical reasons for both here as with above.

3) beta should remain at ~1.5. stock's returns should be no more or less variable vs. the mkt.

4) same as 3) ... i tend to go with more risky here and maybe less risky for 3) as the stock is now expected to do worse/better than priced in respectively. id further have to guess that a more unfavorable ruling would change the beta more than a proportionally more favorable ruling.

5) beta should increase. it should change by as much or more than 1), probably more.

so i dont see a case where the stock would become less risky & thus reduce its beta vs. the mkt (unless of course the ones that are more favorable reduce the beta because now the stock has stronger earnings prospects... but that should still be more volatile in price of the stock terms than what has been seen in the past). so in the case of the identically as favorable ruling, doesn't the beta of the stock remain the same and thus those who were holding it for the 1.5beta should still hold it for that same beta? how would the beta be reduced to 1 (mkt perform)?

i guess in this case it probably won't...but if the beta is like 1.05 or something it is more reasonable for it to drop to 1.0. hwoever, i don't see how a .05 higher beta would attract high beta seekers in the first place nor how a drop of .05 would scare off investors who wanted to hold the stock prior?

anyways, i've asked a ton ... how is the logic here so far?? also, if you can, let me know where i've gone astray and why

Thanks in advance,
Barron

Re: Could Someone Research This Angle
 

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All I know so far is that you guys are guessing and are as lazy as I am.

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Wrong again. What I posted is a result of trading and following patent lawsuit plays like RMBS and RIMM and others. Simply finding lawsuit plays and finding what the stocks did afterwards is useless for the reasons I stated above. There are far too many variables surrounding lawsuits for anyone to conclude that the stock action is based on the lawsuit ending alone. So then you'd have to filter out the companies that were of any size to meet your criteria. The resulting sample size would be tiny. Then you'd have to research the circumstances around the lawsuit. After all that, I doubt you'd have more than a few examples, and making a conclusion that their stock action was due to "freeing up" of resources would be ridiculous.

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Rambus RMBS subsists entirely on patenting technology other people have developed and then suing them over it. It would be a good place to start collecting data.

May5 2001, loss stock dips
Jan 30, 2003 Win (earlier fraud verdict against thrown out) stock up 60%
Dec 22, 2004 Infineon asks for dismissal of lawsuit rambus down 15% immediately, 25% in coming month.
march 21, 2005 Rambus and Infineon settle, Rambus up 30%

April 24, 2006 Rambus wins vs Hynix, stock soars 15% to 44.50

Rambus vs Micron (again) mid last year, July 2006? Rambus loses stock drops hard to approx $15 then to $10 over a month.

Today several cases including Rambus vs Samsung, vs Alberta Telecom, and FTC complaint vs Rambus still pending. Not completely sure since they are having troubles filing their reports. stock at $20

This all stems from Rambus holding an open forum to discuss the future of RAM in the late 90's, patenting all the ideas and charging 3x the normal licensing fees. Since then they haven't created a useful product but have filed an enormous number of patents most of which have been thrown out when challenged but a few have held up in court costing the companies that actually produce a good product.

Certainly some stocks have prices that are greatly affected by lawsuits even expected ones.

Re: Could Someone Research This Angle
 

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Even if 4 went up for every 1 that dropped, if it went +10, +10, -40, +10, +10, there's no 'alpha' there.

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Now you'll need to explain "alpha" to him. [img]/images/graemlins/grin.gif[/img]

Re: Could Someone Research This Angle
 

This "angle" has surely been researched as basically every other event study has to a significant degree. Very few trades are done at a price different from the new price after the news comes out. It is one of the basic arguments FOR market efficiency that angles like this have not been profitable.

It is of course noted that there is significant "drift" in the stock price after the jump to the new price after the event, but the trick to being able to trade on that anomoly one must be able to identify whether or not the drift will be up or down (which is to say whether the market over- or under-reacted to the news). It has been shown that taking a stand in one direction (either fading the public or riding a long) does not in fact produce an abnormal return.