Could Someone Research This Angle

David Sklansky · #1 05-01-2007, 08:23 PM

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.

DcifrThs · #2 05-01-2007, 08:26 PM

[ QUOTE ]
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.

[/ QUOTE ]

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

Barron

kimchi · #3 05-01-2007, 08:37 PM

[ QUOTE ]

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.

[/ QUOTE ]

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.

pig4bill · #4 05-02-2007, 12:38 AM

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.

David Sklansky · #5 05-02-2007, 01:20 PM

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.

hawk59 · #6 05-02-2007, 01:42 PM

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.

nineinchal · #7 05-02-2007, 02:20 PM

[ QUOTE ]
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.

[/ QUOTE ]

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

BradleyT · #8 05-02-2007, 03:36 PM

[ QUOTE ]
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.

[/ QUOTE ]

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.

pig4bill · #9 05-02-2007, 04:38 PM

[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

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.

[/ QUOTE ]

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.

ahnuld · #10 05-02-2007, 05:08 PM

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.