Security Stocks Break Through! Industry Registers Record Year

Happy days are here again

The skies above are clear again

So let’s sing a song of cheer again

Happy days are here again!

After three years of stock market declines, the market rebounded in 2003 with sharp price increases across the board – especially in the high visibility, technologically driven security industry.

For the year, the venerable Dow Jones rose 25.3 percent, the Standard & Poor’s 500 jumped 28.6 percent, while the small cap Russell 2000 surged 49.5 percent with signs the economy was revving up. The Mallon Global Security Index, which consists of 180 security company stocks (or companies with significant security divisions or subsidiaries) rose a record 56.6 percent.

Among the security sectors that registered phenomenal growth were the electronic asset surveillance group, which skyrocketed 165.3 percent, and the security communications group, which gained 139.5 percent for the year. The invigorated computer security group, which was crushed by the Internet meltdown, rebounded with a 116.2-percent jump for 2003.

The top 10 security stock performers for 2003 were dominated by small and micro cap, technology driven firms with three from the security communications space, two in network security and another two in asset tracking.

Taser’s 1,953% Explosion Stuns Industry, Wall Street

The security surge was led by a small, Arizona-based stun gun manufacturer called Taser Int’l (NASDAQ/TASR), which was the talk of the industry and the stock market with an astronomical gain of 1,953 percent. The price of the stock on Jan. 1, 2003 was $4.04 and, after some highly publicized orders for its nonlethal weapons by airlines, law enforcement and the military, it steadily rose during the year to close on Dec. 31 at $82.96.

The company’s core product, the Taser M26, shoots electrical pulses into a target up to 21 feet away, overwhelming the normal electrical signals within the body’s nerve fibers and immobilizing the target.

With the stock at nose-bleeding level, it is trading at a whopping price/earnings (P/E) multiple of 184 and at 16 times sales and 24 times book – reminding some badly burned cynics of the glory days of some Internet stocks.

Security Communications Firm Skyrockets 886%

Taser was not alone in 2003 with other small cap security firms also registering record-breaking stock gains for the year.

The micro cap security communications firm Technical Communications (OTC BB/TCCO.OB), which began the year selling at a distressed 36 cents a share, finished with a flurry to close on Dec. 31 at $3.55 for a mammoth 886-percent gain for the year.
Based in Concord, Mass., Technical Communications designs, manufactures and markets communications security devices and systems. Its products enable users to transmit information in an encrypted format, protecting confidential communications between radios, telephones, fax machines and data processing equipment.

Tumbleweed Rolls to 427% Gain, Ends at $8.17

Tumbleweed Communications (NASDAQ/TMWD), another firm that secures communications, was a big winner for the year with a stock gain of 427 percent. On Jan. 1, it was selling at a lowly $1.55 a share and surged during 2003 to close at $8.17.

The Redwood City, Calif.-based company, in addition to producing products to make Internet communications secure, also offers anti-Spam E-mail firewalls to its customers – a large number which are from the financial community and government agencies.
For its nine months ended Sept. 30, Tumbleweed reported sales of $20.5 million, up only 5 percent compared to the prior year’s comparable period. Its net loss was $1.8 million for the period, down from a loss of $3.4 million in the same nine months of 2002.

Wireless Specialist EFJ Climbs a Whopping 372%

EFJ Inc. (OTC BB/EFJI.OB), which ranked No. 4 in the security industry stock performance sweepstakes with a gain of 372 percent for the year, was still another winner from the burgeoning security communications sector.

The Lincoln, Neb.-based firm manufactures wireless communications systems and information security products, including portable land mobile radios. It uses digital encryption technologies to prevent unauthorized access to sensitive voice communications.

For the nine months ended Sept. 30, the company’s sales rose 11 percent to $32.8 million. Its net loss for the period was $2.5 million vs. net income of $784,000 for the comparable period of 2002. The stock of the company finished the year at $5.90 a share, rising steadily from $1.25 a share on Jan. 1, 2003.

EFJ was the only returning company from last year’s top 10 security stock performers. It increased its earnings 140 percent to place third in the 2002 listings.

Despite Slow Sales, Axcess Sees 333% Gain

Axcess Inc. (OTC/AXSI.OB), which provides asset tracking and CCTV video surveillance services, had another good year, stock-wise, with an appreciation of 333 percent for 2003.

Although the Carrolton, Texas-based company has not been generating much in the way of sales (less than $1 million for the first nine months of 2003), it did restructure its balance sheet late in the year with a five-year extension of a $4 million note and the conversion of some preferred stock into equity. It also became a supplier to the PSA Security Network, the world’s largest buying security cooperative.

Bottom Half of Top 10 All Up More Than 200%

Rounding out the top 10 stock performers for the year were DBH Industries (NASDAQ/DHB), a manufacturer of bullet-resistant garments and related ballistic accessories (320 percent); UNOVA (NYSE/UNA), a supplier of wireless network products (280 percent); OMTOOL (NASDAQ/ OMTL), which provides secure document exchange systems for businesses (278 percent); Psychiatric Solutions (NASDAQ/PSYS), the acquirer of Ramsey Youth Services (274 percent); and Aladdin Knowledge (NASDAQ/ALDN), a provider of computer software security systems (239 percent).

IR, Tyco, Honeywell, JC Pace the Large Players

Some of the larger cap, NYSE-listed security companies, or companies with significant security divisions or subsidiaries, also registered solid stock gains for the year – although not as dramatic as some recorded by the smaller cap, technologically driven performers.

Tyco (NYSE/TYC), in the post-Dennis Kozlowski era, bounced back in 2003 with a 56-percent increase in its stock value for 2003. Ingersoll-Rand (NYSE/IR) – continuing its expansion in the security industry through the acquisition of another systems integrator – jumped by 58 percent.

Honeywell (NYSE/HON) and Johnson Controls (NYSE/JCI), both with security systems integration operations, registered strong stock gains for the year of 39 percent and 45 percent, respectively.

Armor Strategy Pays Off, Checkpoint Bounces Back

In addition, some of the smaller, but well-established names in security also performed impressively in this turnaround year.

Armor Holdings (NYSE/AH), after disposing of some security assets and shifting into defense through its acquisition of Simula, surged by 92 percent to close at $26.47. The stock of Checkpoint Systems (NYSE/CKP), which was hammered after the company was hit with a mega anti-trust judgment, bounced back and jumped 84 percent for the year.
Another turnaround company, Corrections Corp. of America (NYSE/CXW), had a good year, registering a 70-percent stock gain.

Pro One Among Losers, Pummeled by 82% Loss
And where you have winners, you must have losers.

Some of the security companies that had their stock almost evaporate during the year include Biometric Security (OTC/ BMTS.PK), which went from $5.50 to 2 cents, and Mark Holdings (OTC.BB/MHDG.OB), which dissolved from 3 cents to zero.
The stock of Protection One (OTC BB/POIX) plunged from $2 a shar
e to 36 cents for a dr

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