Digital Ally (NYSE: DGLY) Stock Price Soars Again - but Beware These Bearish Indicators

Digital Ally Inc. (NYSE: DGLY) stock's wild ride continued again this morning (Tuesday), as shares quickly jumped to $16.24, a 30% gain from yesterday's closing price of $12.50.

At today's high, the DGLY stock price is now up 344% since last Monday's closing price.

Digital Ally develops wearable cameras that received an influx of attention following the fatal police shooting of an unarmed teenager in Ferguson, Missouri, earlier this month. The shooting of 18-year-old Michael Brown on Aug. 9 led to a major petition that would require police officers to wear cameras while on duty.

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The company issued a press release last week saying that inquiries into its FirstVU HD Body Cameras had increased dramatically due to the unrest in Ferguson.

"The unfortunate events in Ferguson, Missouri, have clearly awakened the law enforcement community to the risks associated with inadequate audio/video documentation of virtually all activities that occur when officers on duty interact with the public," Chief Executive Officer Stanton Ross said. "Some state governments are considering legislation that would require all law enforcement vehicles and officers to be equipped with some sort of audio/video recording capabilities."

The FirstVu camera is pricey, retailing for $795 each on the company's website. The company notes that they are very small in size and can be pinned to shirts, or affixed on eyeglasses.

Title: DGLY - Description: DGLYBut it wasn't just Digital Ally's cameras that saw an increase in inquiries. DGLY stock became an extremely hot commodity following the incident.

Yesterday, more than 24 million DGLY shares exchanged hands, making it one of the most heavily traded stocks on the Nasdaq, according to Reuters.

In the last five trading sessions DGLY has had an average trading volume of more than 10.1 million shares. From August 2009 through June 2014, DGLY had an average volume of just 13,000.

As investors swarm the stock, signs point to more cities adopting wearable cameras for their police forces...

Last year, an April study in Rialto, Calif., showed that complaints against police officers were down 88% after the city required police officers wear cameras. The same study showed that "use-of-force" incidents by the police was down 59%, and that both officers and suspects were less likely to violate rules when cameras were worn.

A 2013 Cambridge University study of Taser International Inc.'s (Nasdaq: TASR) similar video equipment estimated that the wearable camera market was worth about $500 million in North America.

Similarly, a statement from New York City's Public Advocate Letitia James last week noted that equipping New York City's police force with cameras would be a $32 million undertaking. The City of New York paid roughly $152 million in police misconduct settlements last year.

While there appears to be a large market for wearable cameras, that alone does not tell the full story about DGLY stock. Here's what investors need to know before jumping in to this rally...

DGLY Stock Has Momentum, but Not For Long

While Digital Ally's products fit this growing market, it is far from the only company developing wearable cameras.

Taser International is the most widely used company for police cameras and has outfitted the police forces of more than 20 U.S. cities. In its last earnings report, Taser doubled the number of police contracts it had from the previous quarter.

Another major competitor is Vievu, whose wearable cameras are used by more than 4,000 agencies in 16 different countries.

But that's not the only problem...

Even Taser officials have admitted that it's not a simple process for police forces to adapt these new devices as part of their everyday routine.

"It's not as simple as handing out cameras and sending officers on their way," Taser CEO Patrick Smith told investors this month. "There are policies that must be written and implemented, IT departments to work with, public relations messaging to be crafted by cities."

On top of that, DGLY's financial figures are extremely unappealing...

In its last earnings report, DGLY had earnings per share (EPS) of -$1.14, which was down from -$0.99 the previous year. At the same time, the company reported revenue of just $15 million in its last report.

According to Yahoo! Finance, the firm's return on equity is a dismal -64%. Net operating cash flow was also recently reported as -$750,000, a drop of 494% compared to the previous year.

Moreover, only 9% of the company's revenue is generated from its wearable cameras. More than anything, this stock has benefited from the media stir the situation in Ferguson has created.

Investors finally seem to be taking notice. According to the research firm Markit, 68% of the DGLY shares available to borrow are short bets, as many investors wait for the inevitable correction of DGLY shares.

DGLY is a small company ($32 million market cap) whose shares caught fire following a media firestorm. Investors who played the stock perfectly banked triple-digit gains, but for those looking for profit opportunities, the ship has already sailed.

Share this story on Twitter @moneymorning and @KyleAndersonMM using #DigitalAlly.

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