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Taser's Unwanted Buzz

By Seth Jayson (TMF Bent)
January 10, 2005

Editor's note: This Take represents one writer's viewpoint and does not necessarily represent the opinion of The Motley Fool.

The buzz began late last week. Word was, the SEC was looking into a couple of issues at Rule Breakers pick Taser International (Nasdaq: TASR). Specifically, the SEC wants to know more about the firm's safety claims for its stun guns and about a late-quarter sale that included 1,000 civilian-model Tasers sent to Davidson's Inc. The stock dropped almost 20% on Friday and is down another 11% today. And what's bad for Taser is, of course, good for the Pink Sheet wannabes such as Law Enforcement Associates and Stinger Systems.

The firm released some verbiage aiming to diffuse the fallout of the SEC actions, noting that it would comply with information requests and defending its safety record. Moreover, it tried to dispel the talk of channel stuffing by reiterating that the Davidson's sale included no right of return.

It's been a rough month for this high flier. In early December, the firm issued a preemptive strike against a Miami Herald article that didn't even exist yet. Next, it had to cope with fallout from its relationship with board member and failed Homeland Security appointee Bernard Kerik when it was disclosed that he engaged in some questionable behavior, none of it Taser-related -- unless you count recent, massive insider sales.

Moreover, Taser sued nettlesome rival Stinger Systems on a variety of claims, many of them regarding its corporate status rather than the merits of any competing stun gun, vaporware or not. Unfortunately, a corporate culture that's desperate to maintain high growth is what may be reflected in a purchase order described by the New York Times Company's (NYSE: NYT) flagship publication in a Friday article. The $700,000 order on the last business day of the quarter carried the ominous distributor's postscript, "Hope this will help out!!!!!" Of course, as the paper noted, that document was provided to it by someone with a short position, so you know what his hopes are, but if it's real, this is a very, very serious problem.

When this Fool stirs this all together, lets it ferment a little, and takes a whiff, he gets a snootful of something nasty. Smells to me like Taser is managing its stock price more than its product.

That's hardly surprising, since Taser's stock really is the company's No. 1 product. Insiders sold more than $142 million worth of shares last year, with $92 million of the dumping coming in the fourth quarter, according to numbers confirmed with Taser by Gannett's (NYSE: GCI) USA Today. Think it's just a coincidence that this happens at the same time sales seem to have gotten tough? How much of your hard-earned money do you want to bet on that?

Even if the timing is inconsequential, the scale is simply overwhelming. Compare that $142 million insider jackpot to Taser's revenue over the trailing four quarters: less than $60 million worth of gear. Sure, it's no Research Frontiers (Nasdaq: REFR), but the folks paying top dollar for those management stubs have seen their shares diluted by more than 20% over the same period.

The traders have a word for those get stuck with shares when a former high flier comes crashing back to earth: bagholder. Though I've given Taser's valuation the benefit of the doubt in the past, I wouldn't be stuck holding this bag. I'm no longer sure that management is interested in leaving anything inside for the rest of us.

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Seth Jayson has no positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.