Biggest Disappointment: TASER

In the spirit of the Winter Olympics, The Motley Fool is pitting companies against one another. The writers will outline why their company should win, and our very own panel of judges will decide the winner after a period of deliberation. Stay tuned for more!

Competition, especially of the Olympic variety, can be gut-wrenching. There's no thrill of victory without the agony of defeat. And the same holds true for the stock market. For every great pick, there's one that just ... looks ... terrible.

Take TASER (Nasdaq: TASR  ) , for example. The stun-gun maker, selected twice by our team at Motley Fool Rule Breakers, including once by yours truly, hasn't exactly put in a gold-medal performance. Our original recommendation is still down more than 60%. Ouch.

Still fighting the law
I can sum up TASER's woes in one word: lawsuits. There are dozens of them on the books. As of the most recent quarterly filing, TASER was involved in more than 50 legal actions, including 44 product liability suits. Two of those cases were dismissed in early January, and a third was thrown out not long after.

Still, the remaining suits represent a massive potential liability for the company, which I examined last summer here and here. Allow me to summarize if you're in a hurry: TASER's legal defense deductible is on the rise, its administrative costs have practically mirrored its earnings decline, its coverage is cumulative and renews annually, and multiple $10-million-plus judgments in a year could irreparably harm the company.

Bad vibrations
TASER's other problem involves perception. Co-founders and brothers Rick and Tom Smith have been cast in the media as cocky and pugnacious. I find this somewhat unfair. But there are times when the Smiths create their own problems, such as when they went on and on about naked shorting in a press release that was intended to disclose a formal Securities and Exchange Commission investigation. (That case was resolved in TASER's favor.)

In fairness, TASER appears to have been a victim of naked shorting. But that doesn't have much relevance to investors concerned about the investigation itself. I said so when asking Rick Smith for an explanation. He offered one, but I still find it less than satisfactory. Frankly, it's hard to believe that management has shareholder interests first in mind, especially when its PR strategy seems so evasive to me. And that's coming from a former PR guy, folks.

Buy low, sell high?
Yet, annoyed as I am by TASER's bumbling, I'm still bullish on the shares, for three good reasons. First, so-called competition from Stinger Systems (OTC BB: STIY.PK) and Law Enforcement Associates (AMEX: AID  ) is weak, at best. Second, TASER, just a $50 million business today, sits at the epicenter of a market that is conservatively estimated to be worth $10 billion. And, finally, insiders -- including both Smith brothers and their father, Phillips -- aren't selling.

They could be, though. More than 500,000 stock options were exercised in December, at prices ranging from $0.32 to $1.47. None were sold. That's a lot of 10-bagger returns left to the whims of the market, and I can think of only one explanation: The Smiths believe the shares are going higher. At that, the battered, broken Rule Breaker in me smiles weakly and says, "I hope you're right, fellas."

Check in with the competition:

TASERis a two-timeMotley Fool Rule Breakersselection.

Fool contributorTim Beyershasn't yet been stunned by a Taser. He's hoping to avoid the experience. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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