Shocker for Your Short List

How I've dreamed of this day, you'll never know.

Since I started paying attention to the dozens of penny-stock companies hoping to cash in on our national insecurity, a couple in particular have seemed like spectacular investment ideas -- if only they could be shorted.

I'm talking about the two companies that put their names on the map by saying "Hey, look over here! No, down here in penny-stock land! See me? I'm the next Taser International (Nasdaq: TASR  ) , only better!"

I've written plenty about these pretenders to the throne. The short history of Stinger Systems (Pink Sheets: STIY) is mostly full of unfulfilled promises. Alas, it's unshortable because it still trades on the pinkies. But Law Enforcement Associates (AMEX: AID  ) just moved up from the billboard, so it may soon be ripe for the shorting.

Bad behavior
If you need to know what kind of company LEA is, I can think of no better indicator than this: It pays one of those penny-stock-shilling websites $4,000 a month to pump out the usual press-release hype. Yes, according to this site, it's still at it. By the way, it has issued official (but easily debunkable) whoppers to shareholders about this unseemly behavior, as I pointed out several months ago.

In a more recent release, President/CEO Paul Feldman -- the filings are vague on his official title -- actually complains about the lack of upward movement in the share price. That's exactly the kind of misdirected energy I like to see from the management of a firm I'm planning to bet against. Moreover, if this is such a screaming bargain, why doesn't Feldman buy shares? I don't see any of that action in LEA's SEC filings, even at its recent price of $2 a stub. What does that tell you?

As for the folks on the other side of this trade, I wouldn't worry too much. The enthusiastic folks who email me about the stock are generally the chuckleheaded type who call naysayers "loosers" before regaling us with their naive dreams: that the LEA stun gun is "safer," or that General Dynamics (NYSE: GD  ) , General Electric (NYSE: GE  ) , or Raytheon (NYSE: RTN  ) must be champing at the bit to acquire LEA's precious know-how.

Uh-huh. Sure.

If you need more reason to consider poking this puppy with the short stick, you'll want to reread Chris Byron's Jan. 17 article at the New York Post (though you'll have to pay to obtain it from the archives). It centers on the complex mishmash of penny-stock firms (Nevada minerals -- of course -- plus boat movers and Armenian Internet and/or cancer-research companies) through which the current LEA was created.

It also mentions John Carrington, the former North Carolina state senator who still controls the majority of the company's shares, according to the last annual report. You may find it interesting that he and Feldman both dumped hefty piles of shares back in January, when the stun-gun hype (but no actual stun-gun financial successes) had driven LEA's share price up to $11 a pop. Shortly thereafter, Carrington resigned from LEA's board for the usual "personal" reasons. Not surprisingly, LEA responded to Byron's article by crying foul and suggesting that it shouldn't be tarred with this history.

You may think otherwise. I sure do. Since Carrington and Feldman sold in January, the stock has drifted down toward $2 before popping back up to $4 and change. Now Feldman issues press releases calling it "undervalued"? By what measure? At 13 times sales, I'd say it's still trading for a lot more than it's worth.

A peek under the hood
For the record, LEA actually peddles more surveillance equipment than anything else, and is especially excited about its under-vehicle video-inspection unit. This might seem like a great opportunity, but remember that a mirror on a stick (pretty cheap) is the standard competition. And if you do just a bit of digging, you'll see that as sales have risen over the past couple of years, operating and net margins have actually gone down, while the share count has ballooned. In the last reported quarter, the company turned a big sales increase into a cash burn from operations of $440,000. And let's be honest -- this thing doesn't jump because of car-peeping systems. It jumps because speculators hear something about the next stun gun, confuse LEA with the Taser of two years back, and get blinded by imaginary dollar signs.

Could the firm turn things around? Hey, anything's possible, but a history of snatching defeat from the jaws of victory suggests to me that it's not likely. If you factor in the blatant stun-gun hype and a chief executive who shed shares at the highs but now promotes them via PR at the lows, I think I know which way the wind blows here.

This could be my dream short, at least if we can get a bit of a "new exchange" pop to push the share price into a range where our brokerages will let us bet against it. For now, I actually hope the shares rise -- it'll just make LEA a fatter hog for the slaughter.

A short list of related Foolishness:

Taser International is aMotley Fool Rule Breakerspick. To find more stocks that might just change the world, try a free 30-day subscription today.

Fool contributor Seth Jayson won't believe the hype. At the time of publication, he had no position in any firm mentioned.View Seth's Fool profile here.


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