I added to (DGLY: 4.03 -8.41%) today on weakness. I have been long this stock since $7.31.

DGLY makes video surveillance equipment for the police. In our increasingly Orwellian society, I can see “increased surveillance” as a trend that continues to grow, especially as the costs associated with recording and storing the surveillance go down.

Its revolutionary new product is a digital video recorder that fits into the rear-view mirror of cop cars. The popular feature is that the recorder sends the data back to HQ wirelessly and streaming when the officer passes through certain hotspots. This live video evidence assists in the prosecution of the criminal, should they commit an additional crime or admit to something while in custody.

The company has several advantages competitors don’t share. One is that the rear-view mirror will fit any make and model car. Two is the automatic wireless download, allowing the officer to record a lot of stuff (up to 16gb!) meaning drive space is not a concern. Also, the high quality recorder eliminates the need to record at something shitty like 2 fps.

The other flagship product is a digital video flashlight camera. This could be a huge seller, because from what I’ve noticed, Cops carry their flashlights everywhere. Now, imagine if that thing could record, shine, and send all at once! The police may still suck, but dammit, they have cool gadgets.

The company has several positive catalysts. One, they recently moved from OTC to the Nasdaq, legitimizing them. They have no analyst coverage. Mostly importantly, they have gone from a loss to profitability.

In studying stocks, I have found one great underlying characteristic of ALL STOCKS THAT MAKE BIG MOVES. What did NTRI from 2005 - 2006, ATI from 2005 - 2006 and RICK in 2007 all have in common? Clearly, their respective businesses are quite different. What they all shared is massive earnings explosions, from little or nothing.

That is what prompts stocks to make double to triple digit percentage moves over a couple of quarters to a year.

It is my belief that DGLY is just ramping sales, and I plan on holding this stock for a couple quarters if they can keep executing to plan (i.e. selling a lot of shit).

Revenue looks like a Ragin’ Cajun option play, as sales were up 370% in 2007, with net at $19.4 million, pushing the company into the black for the first time. Margins are strong, q4 was 20%. The company anticipates that 2008 will be “super fucking sweet” with entry into new markets (like schools, buses, mass transit), and a broader push of new products like its video flashlight. 2008 revenue guidance is 40 million, currently valuing the company at 3.9x sales. If you look at TASR, which is in a similar business, though with less growth and more lawsuits, they are currently valued at 3.98x sales.

This leads me to believe that–TASR is overvalued (yes) and/or DGLY is undervalued. TASR has revenue growth in the teens, and its product doesn’t add much in the way of officer safety–cops have guns. A TASER is meant to be a “non-lethal method of subduing people.” I think with dwindling police budgets, cops will opt to protect themselves with the remaining resources, rather than buy more TASERS.

From a Bloomberg article about police budget cuts, I read:

While two-thirds of U.S. police departments own at least one Taser, only a third of officers carry them, estimates Minneapolis-based analyst Steven Dyer of Craig-Hallum Capital Group LLC. The figures show that some departments can’t afford more, he said.

“They’re selling to people who don’t have money,” Dyer said in an interview. He lowered his rating to hold from buy after Taser’s first-quarter sales missed estimates April 24.

“Their customers are municipalities,” Dyer said. When cities have to scrape for money to finance schools and repair roads, “Tasers become a lot more discretionary.”

To me, TASR looks like it has limited growth left, remains expensive compared to DGLY, and this is after shares have been demolished this year.  I think struggling municipalities will invest MORE in safety and surveillance, as oppose to discretionary items, especially in light of there being fewer officers around.

All the catalysts for DGLY, from the no analyst coverage, to the fundamental prospects of the company, lead me to believe there further price per share appreciation ahead.