2006 in Review: TASER

Pity the stock that starts strongly and ends weakly. In 2006, it was stun gun pioneer and Motley Fool Rule Breakers pick TASER (NASDAQ:TASR).

More stunning performances
January was great. First, Stinger Systems revealed the apparent ineptitude of TASER's so-called rivals with a miserable earnings report. Then, the next day, courts dismissed two more product liability cases against the company, upping the "victory" tally to 11. All was well, and the stock surged 8%.

February would be just as good. For example, TASER published its first tests of the eXtended Range Electro-Muscular Projectile, or XREP, which seemed poised to help the firm win more business from the military. Investors ignored my bellyaching and pushed the stock to $10.

The enthusiasm seemed justified as competitors foundered. In March, Law Enforcement Associates (AMEX:AID) said it would have to delay its financial filings and restate earnings. By April, the story got worse for both LEA and Stinger. Problem is, TASER's first-quarter results weren't much better. Profit was lower-than-expected and free cash flow, while positive, benefited from an 85% decline in capital expenditures.

But that didn't stop management from crowing about record revenue. To at least one Fool, it seemed less like a quarterly report and more like a PR stunt. His counsel at the time: "Foolish investors shouldn't jump in quite yet, given management's past actions." That was May 1. TASER's stock finished the day at $10.39 a share. It would climb to $10.62 a week later, but go no higher.

Blame the hype machine. During May, crazy claims involving pigs and cocaine overshadowed the good tidings brought by the end of an SEC investigation and another court victory. Meanwhile, a delay in its financial filings was eerily reminiscent of earlier problems among rivals. Confused investors started selling, even as I remained bullish.

Then summer arrived. Schoolyard-style bickering added to the silliness as selling pressure increased. Neither better governance nor the on-air debut of the TASER Cam could hold back the tide: Investors dumped the stock as TASER reported second-quarter results that missed analyst estimates by a penny.

If that seems silly, I'm with you. What would come next was anything but. An investigation here at the Fool revealed that TASER had been unfairly coloring settlements as victories in its press releases, including the 11th product liability win that had boosted the shares in January.

August brought good news in a class-action settlement and a new advisory board aimed at boosting military sales. Speculative fires raged in September as Reuters reported that an acquisition might be in the works. And by October, investors tired of buzzword bingo appeared ready for a stunning Q3 report.

TASER didn't disappoint. Sales leapt by 57%. Net profit improved by 540%. And operating and net margins expanded by 15 and 10 percentage points, respectively. It seemed as though the company had finally turned a corner.

But we had to be sure. So we asked our Rule Breakers subscribers to tell us why they'd sell the shares. The best entry pointed to ongoing legal risk. Weeks later, TASER would announce a sting of court victories, though one turned out to be yet another head fake. Today, the stock is back to trading under $8.

Shocking support among Fools
Investors participating in Motley Fool CAPS seem lukewarm on the stock, assigning it a two-star rating:

Fool co-founder David Gardner, who originally picked TASER for Rule Breakers, explains his thesis:

"Everyone questions the management, and I think those questions are justified. But few people who have really studied TASER stun-gun technology and its positive effects both for the police department and for citizen safety can see any ambiguity at all, here. Virtually all the negative headlines (and there have been so many) about TASER supposedly 'causing' deaths have been tossed out in court because the deaths are being caused by other things like toxic drug use that were killing someone anyway, absent the TASER. This product is really catching on ... I'm willing to take the risk."

Fool's final word
I'll add that TASER recently made modest strides in improving disclosure. And, if this story is to be believed, competition is still as inept as ever.

Will those factors combine to drive the stock higher during 2007? That's a question for another day. Be sure to look for our 2007 preview of the stock. And, in the meantime, if you're looking for superior stocks ideas, consider Rule Breakers. David and his team have uncovered six multibagger stocks since this market-beating service was created two years ago. Clicking here will get you 30 days of free access to the entire portfolio of picks. Enjoy, and happy holidays.

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Fool contributor Tim Beyers, ranked 1,004 out of 17,523 in Motley Fool CAPS, isn't easily shocked, but he's pretty sure a TASER shot would do the trick. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on everything Tim is invested in by checking his Fool profile. The Motley Fool's disclosure policy is a rebel with a cause.