Taser Keeps Confounding
Stun gun maker
Taser International
(TASR)
proved an important point this week: overvalued stocks sometimes become more overvalued.
Over the five sessions, Taser has jumped a whopping 45%, mostly due to a massive short squeeze after the firm split its stock 3-for-1.
Short players -- investors who borrow shares and sell them in the hope of buying back later at a cheaper price -- have been betting that the stock split would prompt retail investors to sell shares. When that didn't happen, the shorts were forced to cover their positions, sending Taser up sharply. The stock shot from a split-adjusted $40.71 last Friday to close Thursday at $59.60. They slipped negligibly to $59.37 Friday.
Taking a short position on Taser has been a prescription for disaster in recent months, largely because of how hard it's been to find any stock to borrow. This creates a problem among shorts who often re-borrow stock among different brokers to keep their accounts orderly. The extreme scarcity of Taser shares has made this impossible, repeatedly forcing shorts into the open market to bid up an already dear stock even more.
Had retail investors sold shares as some expected after the stock split, the added liquidity would have enabled short players to manage their bets more easily. Instead, supply remained tight and many short players have been forced to throw in the towel.
So now, Taser is sitting at almost 70 times fiscal 2004 earnings, as measured by Thomson First Call. And while the firm's prospects might look good, analysts say the stock is still expensive. "Expectations for 2004 and beyond are priced into the stock," said Roth Partners analyst Steven Gish before the big run-up in shares this week.
Taser has predicted that sales would double in 2004, as it continues to penetrate new markets. The company posted a 149% jump in revenue last year to $24.5 million, with almost $11 million of that coming from the fourth quarter.
But some analysts say the fourth quarter of last year was an anomaly related to pent-up demand and the close of local budget cycles, not necessarily the start of a sustainable trend. "Failure of the company to not only hit but exceed Street estimates this year could ignite a major correction in Taser," said Gish.
Meanwhile, some troubling news has seemingly gone unnoticed by investors. On Thursday, a Minneapolis man died a week after police subdued him with a Taser stun gun. Authorities said the man had existing medical conditions before the weapon was used on him but the incident is likely to raise questions about the guns' safety.
Taser manufactures and markets "less-lethal" weapons that it says are safe. But the products haven't been widely used by law enforcement agencies or the military and the possibility of litigation down the road is a serious concern.
"This is an appalling, very sad story that would figure to give pause to the 'Taser as safe alternative' view," Jeff Macke, president of Macke Asset Management and contributor to
TheStreet.com's
sister site
Street Insight
, wrote today. "At the very least, the death is likely to lead to extended coverage and related lawsuits." (Macke has no position in the stock.)
Still, Macke noted that Taser "rather obviously has absolutely nothing to do with any sort of fundamentals or news." Since the start of 2003, Taser is up 4,400%.