Gambling In-Security: Anti-Terrorism Stocks Crash Back to Earth

Remember how everybody went nuts over those so-called Y2K stocks back at the end of the 1990s? Remember how, before that, it was the computer anti-virus stocks? Remember the dot-com "incubator" stocks?

It is sometimes said that cocaine is God's way of telling you that you've got too much money - but junk stocks in bull markets aren't a bad way either.

This week we'll look at a vivid example of exactly that: the so-called anti-terrorism stocks, which shot the moon in the wake of 9/11, and are now, a year later, all tumbling back to earth. They're a painful reminder that the forces that really rule Wall Street have more to do with greed and fear than with common sense.

The current best example is Invision Technologies Inc. (INVN) of Newark, Calif., one of the last remaining "Get Osama" stocks that is still circling in orbit a year after the 9/11 attacks.

Invision builds those luggage-scanning machines that are supposed to be able to find bombs in suitcases at the airport. (Invision's only competition is a defense contractor named L-3 Communications, of New York, for which luggage screening machines are not much more than a sideline.)

Twelve months ago this week I warned in print that the machines weren't all that reliable and that we'd all be much better off with bomb-sniffing dogs. Finally last week, the Wall Street Journal reported pretty much the same thing, revealing that the scanners have false alarm rates as high as 30 percent.

So airport officials now say they're planning to begin inspecting check-in luggage by hand, after it goes through the scanners. The whole process will likely start next month, as federal officials rush to meet that impossible Dec. 31 deadline for the inspection of 100 percent of luggage at all U.S. commercial airports.

In other words, travelers this holiday season can look forward to worse confusion and delay than ever, as much the nation's luggage winds up getting inspected twice. And that in turn is guaranteed to swing the critical eye of the media back in the direction of what is still a $32 stock.

The obvious question everyone will ask: Why do we need these machines at all, when their work has to be rechecked by back-room employees wearing sanitary gloves? In fact, wouldn't this whole thing be simpler if we just used dogs?

We'll get more deeply into Invision and its shaky stock price in a minute. But first a quick look back to the last time Wall Street got swept up, overnight, in a frenzy of emotion-charged buying.

Remember the Y2K stocks? These were the companies that were supposedly going to save humanity when the clock ticked midnight in the year 2000.

For some reason I still don't understand, computers all over the planet were supposed to think it was suddenly 1900 again, and planes would begin dropping out of the sky while garage doors everywhere would begin going up and down all by themselves.

My personal favorite in this regard was a piece of penny-stock trash from Vancouver that got truck-dragged to Pennsylvania by a bunch of Canadians, and was dumped at the roadside under the name Zmax Corp. The company claimed to possess some kind of anti-Y2K secret sauce it called its "Vision 2000" software package. Upon that claim, the stock eventually touched $20 per share, giving the company a nearly $100 million market value.

Now wouldn't you know it, the company wound up never making a cent from its Y2K fan-dance. So it changed its name to "Widepoint Corp." and got into the "e-business solutions" business.

That too went nowhere, however, with the result that you may today buy all the Widepoint you want for a dime a share on the OTC Bulletin Board - and thereby get in on the ground floor for whatever comes next.

As for Invision Technologies, well, at least you can say it's American - although at least some of its money may be coming from elsewhere. The reason: Its post-9/11 financial adviser, an obscure Wall Street firm named Donald & Co., is owned by an Israeli outfit named THCG Inc., a one-time Internet play that went busto in the tech wreck and now sells for half a cent a share, give or take.

Donald & Co. itself has offices in various places, including New Jersey, and has been disciplined by industry regulators nine times since the start of the 1990s - most recently last May for failing to conduct customer trades properly.

The firm's president, Stephen Blum, sits on Invision's board of directors, which is interesting when you consider that for the last year Donald & Co.'s parent outfit, THCG, has been holding a warrant for 100,000 shares of Invision at $9.95 per share, which it received following the 9/11 attack as a fee to raise money for Invision on the quick.

The Blum crowd sat with the warrant all through last winter's run-up in Invision's share price. But in July they filed papers to sell it - suggesting, one might suppose, that they think the run is about over.

A lot of others at the company seem to agree. In October alone, officers and insiders at the company sold nearly 430,000 shares of Invision stock, or roughly 15 percent of their total stake, for something approaching $20 million. Maybe they see what's been happening to most of the other stocks in the Get Osama sector.

Consider Taser International Inc. (TASR), which makes some kind of Tom Swift ray gun that's supposedly just what pilots need to subdue hijackers without getting into pitched gun battles at 30,000 feet.

When the stock touched $17 last May, I warned that the company would have to sell six ray guns per plane to every airline on earth every year to justify the price, meaning the stock was headed for a very big fall.

Last Friday TASR closed at $4.80 per share.

Or what about Viisage Technology Inc. (VISG), which makes facial recognition software that would help us spot Osama if he tries to sneak through Customs disguised as Cosmo Kramer? From $14 last winter to $3.35 last Friday.

Or Identix Inc. (IDNX), which does the same thing, as well as help companies catch our boy if he tries to sneak past the guards in the lobby of some building? From $15 to $6.

Invision could be the next to go. The company was founded in the wake of the Libyan bombing of Pan Am flight 103 over Lockerbie, Scotland, 14 years ago. The company's basic product is a kind of CAT-scanner for suitcases, which sells for $1 million per unit and is the size of a rhinoceros.

Revenues from the sale and servicing of these things have grown six-fold since the 9/11 attacks, and they totaled $63 million in the June 2002 quarter, with a backlog of more than $367 million on order. But the vast bulk of that business comes just from the Federal Aviation Administration alone, and the market is hardly infinite.

In fact, an analyst who follows the anti-Osama sector for the Morgan Keegan & Co. investment firm figures the company will sell a maximum of 774 units over the next two years. After that, most of the gold in the mine will be gone.

The analyst puts 2004 earnings at $1 per share, which would translate, in a no-growth business, into not much of a multiple at all. Would you go for an $8 stock? Sounds good to me.

And that might be as good as it gets. With the FAA under the impossible deadline of ensuring that all baggage at U.S. airports is 100 percent screened by the end of next month, it seems almost inevitable that someone is going to wake up in Washington sooner or later and say, "Hey, what about using dogs?"

When that happens, I think Invision will have sold its last rhino-sized scanner.