TASR stuns the street -- Redux
Despite its many business problems, TASR’s stock took off after I pointed out many of these problems in the enclosed January 2004 e-mail – rising from a split-adjusted $8 to as high as $33.45 this January. Since then, the stock has tumbled 78%. As such, TASR is an object lesson in the enormous risks associated with selling short -- where it is often possible to be right about a company at the wrong time -- and thus disastrously wrong about its stock.
-----Original Message-----From: Peter Cohan [mailto:firstname.lastname@example.org] Sent: Friday, January 16, 2004 3:26 PMSubject: TASR stuns the street
You may be stunned to learn that Taser International is one of the best performing stocks of the last year. Its high market valuation, raft of lawsuits, and high levels of insider selling have attracted short sellers. It remains to be seen how much longer the short sellers will suffer.
TASR’s stock has skyrocketed 2,656% in the last year from $3.65 to $122 (an 11% jump today in the wake of its announcement of a 3-for-1 stock split.) This 73-employee Scottsdale, AZ-based manufacturer of stun guns has generated $16.5 million in sales and a profit of $1.7 million over the last year – for a stunning price earnings ratio of 265.
Granted, TASR’s sales doubled from $5.9 million in the first nine months of 2002 to $12.1 million for the same period of 2003. On September 30, 2003 Congress approved the Defense Appropriations Funding Bill for 2004. Included in this allocation of funds was $1 million for the purchase of its products for the United States Army. And since June 2002, TASR has burnished its board with former New York City police commissioner Bernie Kerik.
But TASR has managed to get itself in quite a hornet’s nest of litigation for such a small company. It faces potential damages totaling more than 35 times its net worth.
TASR allegedly failed to pay commissions to a distributor. In March 2000, Thomas N. Hennigan, a distributor of TASR’s products from 1997 to 2000, sued for $400 million worth of unpaid commissions. In April 2001, Hennigan died but his case is still being prosecuted by his estate. A trial date is pending.
TASR allegedly violated a firing technology patent. In April 2001, James F. McNulty Jr. sued TASR alleging that certain technology used in the firing mechanism for its weapons infringes on McNulty’s patent. Specific damages have not been sought but the litigation remains unresolved.
And TASR has been sued by the families of individuals who have died after police hit them with TASER gun “fire.” TASR claims that the deaths resulted from high levels of drugs in the victims’ systems.
TASR has also gone on the offensive against stock message board posters. In May 2003, TASR sued a Yahoo message board poster -- dubbed ubswarbird -- alleging a series of false and defaming statements about TASR and its officers.
TASR’s founding family – the Smiths – has been selling shares.
Since September, Phil Smith has cut his Taser stake by 39%. He sold 136,142 shares at prices ranging from $27 to $80 for a total of $5.5 million, while acquiring an additional 11,392 Taser shares by exercising warrants at prices ranging from $11.88 to 66 cents.
Meanwhile, since late October, Thomas and Patrick Smith have reduced their stakes by 21% and 11% respectively. Thomas sold 46,000 shares for $3.1 million and acquired 10,000 shares by exercising warrants at $7.21, and Patrick sold 32,000 shares for $2.1 million.
Short sellers, who control 62% of TASR’s float, must be in a world of hurt. Earnings are forecast to grow 73% from $0.45 in 2003 to $0.78 in 2004, 28% of its P/E of 265.
If a short seller is right at the wrong time is he really right?