I Think It Might Be Time To Buy TASR

[David Sklansky]

"And methinks David misunderstands EMT. Strong EMT says that the current price is the markets best estimate of value under weighted future scenarios, i.e. the market includes all information and comes to the best possible conclusion on price, so according to EMT, David's insights can provide no edge."

Obviously I was referring to what you call the weak form. The fact that on average, a stock is evaluated properly. So if you think that there is one aspect of a company that is being evaluated incorrectly, you can still assume that the other aspects are being evaluated correctly on average. This works with horses, sports and other things so I see no reason it wouldn't work with stocks.

[DesertCat]

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Obviously I was referring to what you call the weak form. The fact that on average, a stock is evaluated properly. So if you think that there is one aspect of a company that is being evaluated incorrectly, you can still assume that the other aspects are being evaluated correctly on average. This works with horses, sports and other things so I see no reason it wouldn't work with stocks.

[/ QUOTE ]

I don't do any horse or sports betting, so I don't understand why this approach would work in those areas. It seems to me it would have the same problems in handicapping that I think it has in investing. First, let me frame using this approach with TASR to would show why I don't think it should work. If you can explain why it works in handicapping I'd appreciate it.

TASR is about $8 as I write this. Assume there are two scenarios, A) in which sales/profits grow strongly without backlash from the relatively few instances where people end up dying, and B) where sales grow slow or not at all, because of these deaths. In A) TASR is worth $12 per share, in B), $4. A weakly efficient market implies the average participant perceives a roughly equal likelihood for both scenarios, so todays price = (a+ b)/2. As a buyer, you are essentially betting that the likelihood of scenario A) happening is more than 50%.

The problem with this scenario, is that you don't know the values of A or B, or the relative percentage likelyhood the market is putting on each scenario. The market may think A=$9 and B=$2, in that case the chances of scenario A occurring are therefore 6 out of 7. The market may be heavily confident that taser deaths aren't likely to impact the company, so you are being offered little upside and strong downside, at the market's price.

This is why you have to be able to estimate value yourself, to determine what price the market is offering you for your scenario.

Another problem is companies rarely, if ever, offer binary scenarios, they are almost always multifactor. With TASR you have to handicap the following risks

1) Deaths impacting sales.
2) Potential competitors impacting sales. I.e. their ability to protect their IP.
3) Potential replacement products impacting sales.
4) Larger trends impacting sales, i.e. the risk that Amnesty International convinces the EU to put strict police guidelines in place for non lethal weapons that TASR can't meet.
5) The risk that management may produce misleading financials.
6) etc.

According to the EMT, all of these variables are estimated by market participants as best as possible and incorporated into TASR's price. So you don't know how heavily the market is weighting #1 vs. the other factors.

This is why I say you need to do a valuation, and estimate your own risks. My experience is that occasionally the market's estimates are ridiculous, and you have a clear edge. One of the greatest examples in history is in 1973 when the Washington Post was valued by the market at $100M, even though the controlling shareholders could have sold it to a private buyer for $400M at a snap of their fingers. Buffett turned $20M or so into $1.7B by investing there. Not because WPO invented the IPod, but because they continued to run the business well, reinvest profits in it at high returns, and the market eventually noticed the value they had created.

In the case of TASR over the last four years it's made about $20M, or about 33 cents per share (8 cents per year). If you ignore their shareholder settlement, it's closer to $30M after tax, or about 12 cents per share per year. Last year, without the settlement, they would have come in around 10 cents or so. That's a yield of about 1.2%, i.e. TASR has to more than quadruple earnings just to provide the yield of a risk free money market account. The average stock today is yielding closer to 7%.

You are paying around 80x earnings for TASR, which implies the expectation of an extremely high future growth rate. Yet 2006 sales were flat with 2004 sales, and operating earnings have declined by a huge amount (from $30M to $10M w/o the settlement). So where is the rapid growth? Based solely on it's financial performance a fair value would be somewhere between $1 & $2 per share.

So the market is already valuing TASR as if it's a lock to produce enormous increases in earnings over the next five years. It's already pricing in huge upside, so why do you think there is any negativity pushing down it's valuation?

Note that this is just a 5 minute analysis. There could be factors (SG&A has grown immensely the last two years, perhaps they can reverse that) that may make it easier for them to grow earnings and sales. But even if they return to 2004 earning levels, that's only 30 cents per share and a still high PE of 28x. I can't spend too much time digging into TASR as it's not the type of company likely to end up in my portfolio. But I offer this as an example of the basic research you need to do in order to determine the price the market is offering.

[David Sklansky]

"So the market is already valuing TASR as if it's a lock to produce enormous increases in earnings over the next five years. It's already pricing in huge upside, so why do you think there is any negativity pushing down it's valuation?"

Goodness. Maybe I'm wrong about that. But that wasn't what the discussion was about. It was about whether if I'm right about that, I need to know anything else.