By JACK HOUGH
Anyone can spot a low price/earnings ratio. But figuring out which companies hold undervalued patents can provide an investing edge.
Just this past week, Google (GOOG)
These patent grabs suggest tomorrow's dominant smart phone or tablet is a three-legged stool built from software, hardware and communications--and companies are in a race to add rights to whichever legs they're missing. More broadly, big patent portfolios are increasingly being used as financial weapons.
A recent boom in patent sales is lifting patent values in general, says Nir Kossovsky, executive secretary at the Intangible Asset Finance Society, a Pittsburgh research group. And that's an opportunity for stock investors.
Figuring out which companies own which patents is easy. The U.S. Patent and Trademark Office digitized its records more than a decade ago.
Putting a price on each patent is difficult. The math involves projecting a patent's royalty streams, finding similar patents that were sold recently or determining what it would cost to produce a similar patent. For just one patent, valuation work can take weeks and cost tens of thousands of dollars, says Michael Friedman, a managing director at Ocean Tomo, a Chicago provider of patent services.
The Patent Board, a research group based in Westmont, N.J., has an automated way of guessing which patents are most valuable: citation analysis. That means the more an existing patent is referred to in future patent applications, the more valuable it is presumed to be.
The research group doesn't publish patent values but rather ranks companies on Technology Strength, which it bases in part on the quantity and estimated quality of patents. WSJ.com publishes a Patent Scorecard for one industry each week based on these numbers. Cooper Industries, based in Dublin, Ireland, ranked first among industrial components makers on a recent list.
"You can't know the exact value of a portfolio of patents, but you can make broad judgments," says Karl Wilhelm, president of The Patent Board. "Eastman Kodak's (EK)
Of course, Apple's profits and pizzazz have a bigger influence on its stock performance than its patents, and making a patent-based bet on a company like Kodak is risky. There's no telling how many of its patents it can turn into cash as it struggles to return to operating profitability, says Mr. Friedman.
He also says Indertigital (IDCC),
A diversified basket of patent bets seems safer. The Guggenheim Ocean Tomo Patent ETF (OTP),
With the stock market looking wobbly and the threat of a double-dip recession looming, another cautious tactic is to skim lists of patent-rich companies for ones with modest valuations, solid balance sheets and the ability to deliver handsome dividends, with or without a jump in the value of their patents. Johnson & Johnson (JNJ),
For do-it-yourselfers, the government has a patent search tool at uspto.gov, along with reports showing, for example, which companies are granted the most patents each year.
One more factor that bodes well for patent values is the recent rise of "non-operating entities" or, less politely, "patent trolls". These companies buy or take control of patent portfolios for the purpose of suing other companies for violations and securing cash settlements. The legal risk is creating a seller's market, says Jorge Torres, an intellectual-property lawyer in New York. Tech companies would rather scoop up idle patents than run the risk that a rival will buy them as ammunition. That means companies with far more patents than they need might be richer than they look.