Investors can often find value in companies going through rough spots. For an investor seeking bargains, sometimes the best places to look are at scandal-plagued companies that, at first glance, appear to be falling apart. For bargain-hunting investing to work, however, there must be some redeeming quality in the firm -- some compelling reason to sincerely believe that the company will once again thrive.
Possible diamonds in the rough
For example, I recently picked up Puerto Rican mortgage financier and Motley Fool Inside Value pick Doral (NYSE:DRL) at less than $11, when its accounting scandal temporarily knocked the wind out of its sails. By all accounts, Doral is a cash-generating machine, in spite of the problems it's having keeping track of the money it's earning. I also bought a stake in distiller and specialty grain processor MGP Ingredients (NASDAQ:MGPI) after the Atkins frenzy died down and took the company's formerly high-flying stock with it. I'm even willing to take a flier on the occasional cigar-butt investment -- I purchased stock in struggling auto giant General Motors (NYSE:GM) shortly before billionaire investor Kirk Kerkorian started his bid for that firm.
Companies going through rough waters don't faze me -- I'm willing to buy them if there appears to be value in their prices. For Doral, MGP Ingredients, and General Motors, when I bought them, the combination of low price-to-book ratios, juicy dividends, and the cash on hand to support their payouts made them great candidates for me to buy and wait out their rough patches.
This ugly ducking isn't a swan
But I would almost rather be shocked by one of its stun guns than put my money in Taser (NASDAQ:TASR) stock. Yes, Taser has lost about two-thirds of its worth since its peak and nearly 45% since I first warned of the carnage surrounding it, but just because it's down doesn't mean it's cheap. After all, fiber-optic communications company JDS Uniphase (NASDAQ:JDSU) reached as high as $143.69 and is now languishing at around $1.55 a stub. Even if you had bought JDS Uniphase at one-third of its high point, you still would have lost some 95% of your invested cash.
Trading at some 45 times its earnings and more than six times its book value even after its tumble, Taser is still priced as though it were on a tremendous growth trajectory -- a trajectory that is simply not evident in the actual results the company has been reporting. In its most recent 10-Q quarterly filing with the Securities and Exchange Commission, Taser disclosed that its year-over-year sales dropped by more than 22%, while the total cost of making those products barely budged. As a result, margins were squeezed to the point where more than 95% of the company's previous year's profit vanished.
Abuse of its shareholders
As if to add insult to injury, while it has been busy actively shrinking its operations, Taser has also been actively watering down its stock. The number of diluted shares outstanding jumped by more than 6% over the past year. To make matters worse, it's not as though the trend is slowing, in light of the company's troubles. Taser is continuing its brazen disregard of its current shareholders; it recently authorized another 6,800,000 shares (more than 10% additional dilution) for "employee compensation" purposes. I understand the need to compensate people for their work, but stock options should not be handed out willy-nilly, especially not as a "reward" for otherwise actively destroying shareholders' wealth.
What may the future bring?
It's true that Taser has very little viable current competition in the usually nonlethal weapons business. And that market dominance may very well buy the company some time to get itself straightened out. At the same time, there's risk in being the only fish in the pond. Just ask former telecommunications titan AT&T (NYSE:T) what happens when a monopolist comes face-to-face with competition that it finds itself ill-equipped to handle. Ma Bell has been decimated, and it will soon find itself merely a division of its formerly spun-off Baby Bell, SBC Communications (NYSE:SBC).
In Taser's case, I actually do expect the company to eventually straighten out its business and survive. The mere likelihood of survival, however, does not make Taser a compelling investment at this time. There just is not yet sufficient value in its shares to make me want to buy.
Want to read the opposing viewpoint? Click here to read Seth Jayson's thoughts on Taser. Also check out Seth's rebuttal to this piece, as well as Chuck Saletta's rebuttal.
Taser is a Motley Fool Rule Breakers pick. If you like to play the high-growth game, a free trial is just a click away. Prefer safe and cheap? A peek atInside Valuewill also cost you nothing.
Fool contributor and Inside Value team member Chuck Saletta owns shares of Doral, General Motors, and MGP Ingredients. The Fool has a disclosure policy .
