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Buy, Sell, or Hold: Vringo

Sunday - 12/9/2012, 12:30am  ET

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Vringo today and see why you might want to buy, sell, or hold it.

The company develops mobile technologies and intellectual property and boasts more than 500 patents and patent applications related to telecom infrastructure, Internet search, and mobile technologies. It also "operates  a global platform for the distribution of mobile social applications and services including Facetones and Video Ringtones which transform the basic act of making and receiving mobile phone calls into a highly visual, social experience." Video Ringtones is a platform  permitting users to share video ringtones for cell phones, while Facetones lets them share animated slideshows, drawing on Facebook photos. It also offers Video ReMix, permitting remixing of music videos on smartphones or tablets, and Fan Loyalty, a platform involving  reality TV shows and stars.

One plus for the company is the industry it's tied to -- smartphones and tablets. These items are proliferating at an amazing rate, making many companies and shareholders wealthier.

Companies such as Zynga , despite their struggles, are demonstrating how powerful the mobile arena can be and have many investors looking at others in the industry, such as Vringo. Zynga, by the way, is now looking at entering online gambling, which could pay off well, though it will face competition there, too, such as from International Game Technology and Bally Technologies .

There's great potential here, as the company has served more than a million downloads of its Facetones offering and is involved in some patent-related legal wrangling that might generate hundreds of millions of dollars for the company. Be careful with all these possibilities -- speculation can burn investors.

The company has been spending heavily, which isn't necessarily a good thing, but it has been boosting its patent portfolio, in part via a $22 million purchase from Nokia and also via a merger with Innovate/Protect, which held some patents from Lycos. There seems to be a living to be made in licensing patents and litigating against alleged patent violations, but some disparage such activities as "patent trolling." In a dispute with Google , Vringo was hoping to win nearly half a billion dollars but ended up with about $30 million. That's far from nothing, but the result does show the unpredictable nature of such "earnings."

Insider ownership is another draw, with a sizable percentage of shares outstanding recently held by insiders and heavily invested owners. It's generally a plus to have those running or influencing a company own a sizable stake in it, as it aligns their interests with those of smaller shareholders. On the other hand, insiders have been doing much more selling than buying of shares recently. That's not necessarily a bad thing, as sometimes that's just how they extract needed capital from their compensation. But it also can be because they see a price decline in the future or see the shares as fairly or overvalued.

The company has, and has had, some big fans, though, such as billionaire Mark Cuban, who bought more than 7% of the company earlier this year.

Finally, some like Vringo simply because they see it as an acquisition target, eventually to be bought out at a premium price for its valuable patents.

The stock's price, recently around $3.10 per share, is a big concern. That's clearly penny stock territory, and penny stocks are generally risky, often tied to unproven companies, often manipulated by pump-and-dump schemers, and often able to fall sharply, despite seeming "cheap."

If you're not too tolerant of volatility, you might also steer clear. A glance at its stock history will show you why: Within its less than three years trading on the market, its price has been as high as $5.73 and as low as $0.68 per share and has recently been in the middle of that range, roughly. Its beta of 2.21 reflects a stock that's more than twice as volatile as the overall market. Volatility isn't a purely bad thing, but it can be hard for some to deal with.

Meanwhile, the company's financial statements  are a concern, too, featuring rising costs, rising losses, and a sharply rising share count, which dilutes the value of older shares. Debt is negligible, which is good, but cash has been negligible, too (though at the moment its coffers are reasonably full ), and free cash flow is negative.

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