Happy Friday all. (And, TGIF, right?) I hope everybody has something fun planned for this weekend, even if it’s just finishing up the last of the fireworks you didn’t get to use last weekend. No matter what you’ve got on the radar for the next two and half days though, I think I’ve got something that’ll make your weekend at least a little better (and make you a little smarter to boot).

Anybody who’s been a member of the SCN site even for just a few days has already been exposed to a company called VirnetX Holding Corp. (VHC). It’s been nothing short of a completely crazy ride.

This thing took off in early 2010, jumping from $3.40 to $6.60, and then took off again in mid-2010, rallying from $6.00 to $18.50. Then it took off again in April, going from $12.50 to $27.00, and then it rallied again over the past three weeks, from $27.00 to yesterday’s closing price of right around $36.00.

For those of you keeping score at home, that’s a little more than a 1000% runup in a little over a year. Un-freakin-believable.

Now, I’ll confess… based on the strength of the gains alone, I probably would have stopped buying into it after the second big rally to $18.50. Nine times out of ten those kinds of monster moves don’t get repeated, and maybe five out of those ten times the stock actually makes its way back to its original starting point. [That’s a variation on a theme we all have to get burned by at least once…. if it’s too good to be true, it probably isn’t.]

For whatever reason though, I ended up running across something kind of interesting about the company’s foreseeable future, and then got a vote of confidence from someone who’s already proven all they need to prove to me.

What Changed?

Simply put, I’ve changed my mind about VirnetX being ripe for a tumble. Here’s why.

I don’t know how many of you are able to read Cowen and Company research. It’s not always readily accessible, but if you can get your hands on what they publish, do so – this research firm actually talks to the people at the companies it’s rating. (How’s that for a concept?)

Anyway, Cowen put out a piece on VirnetX on Wednesday that really explains (1) what’s been driving VHC through the roof, and (2) why there’s actually a whole lot more upside ahead. I’ll do my best to summarize Cowen’s key point.

VirnetX, in simplest terms, creates security software for wireless and web-connected devices. Not unlike a biotech development, if it creates something novel, it’s awarded a patent. If things go well, the patented process or software becomes the industry standard, and the inventing company collects royalties for the life of the patent, or as long as the technology remains the standard.

Yeah, well, VirnetX just so happens to be sitting on what’s supposed to be the next ‘it’ thing in the next generation of wireless networks.

The new standard in wireless security is the ‘LTE Advanced, Release 10 Series 33’ spec. If you’re not one of the seven people in the whole world who knows what that means, don’t sweat it. I can explain it like this… this new standard secures the mobile device itself, as opposed to just securing the application or connection.

The reason an investor would even care about this is just as simple – VirnetX holds the patent that satisfies the new standard. Mobile phone and smartphone makers can either pay VirnetX an appropriate royalty for use of the technology, or they can break the law by infringing on the patent, and then pay the company anyway after a court case.

Yeah I skipped some of the details, but the meat of the matter is right there – that patent is a revenue-bearing profit center with an explicit monetary value, as number-crunched by a pretty reputable research outfit.

Crunching the Numbers

As for what this technology is worth to VirnetX, Cowen is saying the patent (a set of patents actually) makes the company worth $2.8 billion, give or take. Along those same lines, Cowen thinks the stock’s likely to appreciate by about 50% to get the $1.8 billion market cap up to that $2.8 billion value. They’re also saying the stock should make that kind of gain within a year; I’m thinking the market’s going to go nuts on VHC well before that.

That in itself may be good enough for some of you (it would be for me), but ironically, something else popped up yesterday that sealed the VHC deal in my head.

Because He – or She – Said So

I hope all you guys and gals are following the community’s stock pickers, ’cause some of these traders are just knocking them out of the park. One of the folks I’m still trying to find out more about (like who he/she is) is someone I only know as ‘PaperTrader‘.

Prior to yesterday, PaperTrader has made five picks, four of which have been pretty darn profitable. The average trade he’s (though it may be a woman) placed is ahead by 28%, which is even more amazing considering those have only been long/bullish trades in a pretty crappy market. In fact, if I’m not mistaken, PaperTrader may have the best batting average of any of the site’s traders.

Care to guess which stock PaperTrader re-picked yesterday? You got it – VHC. Either he knows something, or he’s very insightful, or he’s very lucky. Frankly I don’t care which it is… he’s just too good to ignore.

That said, I don’t know that I’d actually go with a stock trade on this one. The option market is plenty liquid for VirnetX, so to amp up the return potential without really taking on a (relatively) major amount of risk, you may be better off buying a call option with an expiry about two months out.

Ways to Play

August, September, and December expiries are available. The September calls look like they have the right balance of time decay (theta) and responsiveness (delta) though, so you may want to start your search there unless you want to get into an exotic time-based spread.

Though I’m not a big fan of buying out of the money (or even at the money) calls, the September 40 calls (VHC 110917C00040000) are a bargain at $2.50. Remember, VHC moved 30 points in just the last year, and if Cowen’s target of a 50% price increase is on the mark, we’re talking about another 10 to 12 points’ worth of upside from here. That puts VirnetX shares around $45, which would translate into an easy triple-digit win for the 40 calls.

If you’re going to go the other way with it and try an in the money call, here’s a case where you may as well go pretty deep. At $6.60 or so, the September 31 calls (VHC 110917C00031000) are almost all intrinsic value, and still capable of a triple-digit gain if VirnetX makes good on its potential move.

Or, you could just buy the stock and not worry about it. No matter what though, VirnetX has a pretty compelling story here…. good enough to make an official pick.

So what do you think? Feel free to reply with your thoughts (good or bad) about VirnetX. Or, if you want to publish something on VHC, you can do it here.