My colleague Jeff Hwang was on to something last Tuesday when he noted that more than half the shares of non-lethal weapons manufacturer Taser International (Nasdaq: TASR ) were sold short. That's a lot of negative sentiment.
That's also a lot of buying pressure if the shorts get rattled. Remember, short sellers have essentially borrowed shares, then turned around and sold them in hopes of buying them back at a lower price. If this suddenly looks impossible -- or even unlikely -- they might decide to cover (buy back the shares they borrowed) all at once. Kaboom!
Well, the shorts got rattled. A week ago Monday, Taser announced a 238% jump in fourth-quarter revenue. At least partly as a result of short covering, the stock soared $6.35 to $51.35. That's an all-time high and a 42-fold jump over the last 52 weeks. The stock settled back to $40.72 by Friday's close, but soared another $18.05 Wednesday -- ridiculous as it sounds, in response to a meaningless 3-for-1 stock split -- to $67.75. The question, obviously, is where do we go from here?
Taser barely floats
In a world where Wal-Mart (NYSE: WMT ) has 5 billion shares outstanding and Microsoft (Nasdaq: MSFT ) more than 10 billion, Taser is a small fish. Of its modest 9.6 million shares outstanding, only 6.6 million are available for public trading -- what we call float. The primary characteristic of a stock with a small float is that it doesn't take too many people shouting "buy" or "sell" to move the stock.
And believe me, this stock has moved. And believe me, too, it's not gone unnoticed. In a recent column, Barron's questioned -- or I should I say ridiculed? -- Taser's prospects and valuation. I've adjusted the prices to reflect a 3-for-1 stock split, but this is a direct quote:
There's no way in the world -- absolutely none -- that Taser's stock is worth $48.67 a share, or even $44.33, where it closed Friday.
Tell us what you really think. And Barron's may ultimately be right, but Taser popped above $67 midday yesterday. Talk about float.
Lilliputian Taser fired back. Chairman Phillips Smith challenged Barron's assertion that the market was saturated, arguing that, "The only support for this conclusion is a quote from me over a year ago that roughly half of the police in the United States knew about TASER." He goes on to insist that penetration of the domestic police market is, in fact, at less than 6%. International penetration stands at less than 1%.
To judge from the stock action since, this must be a case of who knew what when. In all seriousness, that doesn't sound like saturation to me, much less a company necessarily nearing the end of its growth opportunity.
It is rare to see a company fire back at stories in the press, but that's clearly the Smith style. What is not so rare these days is for a company of Taser's size, with a novel product, and such eye-popping earnings and growth, to have its future called into question. (If only the media were so watchful during the dot-com mania, when we needed them.)
A one-trick pony?
Contrary to popular perception, Taser is not a one-trick pony. To be sure, the main attraction is the handheld non-lethal weapon capable of incapacitating an aggressor at up to 21 feet. But Taser is working on other non-lethal devices.
For one, there is a partnership with General Dynamics (NYSE: GD ) to develop other less lethal devices, including an anti-personnel munition. A 1997 treaty to ban land mines was ratified by 141 countries. Holdouts include China, Cuba, Iran, Iraq, Israel, Libya, Russia, Saudi Arabia, Syria, and the U.S. Sounds like some pretty heavy customers that might consider remote-controlled or infrared sensor-fired Tasers to show they are willing to deploy non-lethal weapons. Princess Diana, if she were alive today, would approve, and so should investors looking for socially responsible investments.
The company also looks to expand its rapidly growing handheld product to the military (the device is already being used in Iraq), private security, and consumers. It seems certain that there will always be those who would like to be able to protect themselves and their homes, but balk at stowing lethal force in the nightstand drawer.
Honestly, what would you rather see on your next airplane flight -- an air marshal with a traditional weapon that could bring down the entire aircraft or a TASER? At close range, it is a whole lot more effective than a baton (hear that, bobbies?), chemical sprays, control holds, or even a dog -- and safer to both the officer and the suspect. If an officer were to somehow make a mistake and shoot you, what weapon would you put in his hands?
In its last quarterly report, Taser noted two agencies using its Advanced TASER had significantly reduced injuries. The Orange County Sheriff's Office (which includes Orlando, Fla.) had an 80% reduction in officer injuries. The Phoenix Arizona Police Department saw suspect injuries fall 67%. Results like this should get other agencies to sit up and pay attention, including international police forces.
Really, where to from here?
At this point, Taser has long since evolved from product story to story stock to a valuation debate. I'm focused on the business. The company has the resources to increase its market penetration and to expand into new markets. With $15.8 million in cash, the balance sheet is strong. Increasing sales volume has also helped to radically boost profit margins. Over the last five quarters, margins have climbed from 2.7% to 26.1%.
All eyes are on the stock chart. In the wake of such dazzling performance, the loud consensus among investors is that Taser needs a breather. Even Jeff Hwang agrees, as does CNBC's David Faber, who essentially jumped down CEO Phillips Smith's throat on-air last week (Smith, particularly indignant regarding comparisons to no-profit dot-com-bubble companies, fired right back). Frankly, I think he has a non-lethal point.
After all, if you annualize the current quarter's $0.70 earnings (which will seem unfairly conservative if the company hits its sales targets and approaches the 67% operating margins it thinks is possible), the stock trades at a seemingly daunting 85 times forward estimates. But with the company looking for 100% sales and profit growth in the future, Taser is hardly highway robbery at current levels.
Don't be rash
Investors should listen to last Tuesday's conference call (which runs just over an hour). Pay particular attention to a suggestion near the end about selling 1 million shares to fatten the company's cash position. The idea is that the high stock price (20% below today's high) offers an opportunity to raise a war chest for the future -- one is reminded of Ballard and Celera of yesteryear.
Taser's response can be summarized as follows. "Why dilute current shareholdings when the company is generating all the money it needs to grow organically?" That is stunning if only because it is so Foolishly on target. It is also characteristic of a company where management has significant ownership. Why dilute your share of tomorrow's earnings just to add cash?
It's only natural to be wary of a stock that is up 55-fold in less than a year. But on at least one point, Smith is right: Taser is no dot-com pipe dream. It might seem a stretch, but like an Amgen (Nasdaq: AMGN ) or a Dell Computer (Nasdaq: DELL ) , it is a company that offers something unique with a huge potential market. And like both of these, Taser looks positioned to essentially monopolize that market for the foreseeable future.
But think it over
Ignore the chart and focus on the potential. If such things concern you, consider that this is a socially responsible investment. Market penetration is low, and there are new markets to conquer. And you might get a better -- maybe even a much better -- price at some point in the coming weeks and months. Then again, maybe not.
At this point, Taser is a growth investment, and given the recent run-up, one that could well prove volatile. That said, the company has high insider ownership and the financial resources to grow -- and grow quickly.
Taser has the one-two punch that Tom Gardner'sMotley Fool Hidden Gemsnewsletter looks to exploit. Take a 30-day free trial and uncover companies that are yet to appear on Wall Street's radar.
Motley Fool contributor W.D. Crotty does not own Taser stock, but certainly idolizes anyone who found this early. The Motley Fool is investors writing for investors.