In the aftermath of the civil unrest in Ferguson, MO, public cries for accountability in law enforcement have forced politicians to seek a solution to a growing problem in America: rising incidents of alleged police brutality.

And if a U.S. senator from the state of Missouri gets her way, a little-known micro-cap company that specializes in sophisticated software-based security and surveillance products could be the next jackpot winner on Wall Street.

That micro-cap company is Image Sensing Systems (ISNS), and the U.S. senator hammering home the need for local law enforcement to purchase the very technology that Image Sensing System’s sells is Claire McCaskill of Missouri-D.

With widespread use of miniaturized video technology already commonplace among the general public, calls for law enforcement to issue body cameras to patrol officers in the past has been met with resistance by nearly all police chiefs across the U.S.

But when a U.S. senator – from the state where the spotlight of the controversial Aug. 9 fatal shooting of a teenager shone brightly on the problem of alleged police brutality – plans to ameliorate the problem with a compulsory deployment of body cameras to an estimated 780,000 active patrol officers (according to Wikipedia) throughout the U.S., the potential bumper rise in orders to such a small company as Image Sensing Systems could gyrate the stock higher than many traders now believe.

The Catalyst for a Bull Market in ISNS

On Wednesday, $375 million change hands in ISNS as the stock briefly breached its 52-week high with a $9.94 print before settling at $7.75, up $1.08 (16.19% return) from the close Tuesday.

However, the connection between ISNS and the Aug. 9 tragic incident in Ferguson wasn’t apparent to Wall Street until Aug. 26.

It seems that some traders had had advance knowledge that a Springfield News-Leader article, titled, “McCaskill: Cops without body cams should not get federal funds” had been scheduled for publication after the close of trading on Aug. 26.

Front-runners traded more than 3.4 million shares that day, taking ISNS at one point as high as $3.97 (66.8% return).  Prior to the 26^th, the average volume of the stock was a mere 33,976 shares.

“It seems to me that before we give federal funds to police departments, we ought to mandate that they have body cams,” McCaskill told the Springfield News-Leader in the Aug. 26 article.

“I think that (body cams) would go a long way toward solving some of these problems and it would be a great legacy over this tragedy that’s occurred in Ferguson, regardless of what the facts say at the end as to whether anyone is criminally culpable,” McCaskill said.

Three trading days following the Springfield News-Leader saw profit taking in the stock, but ISNS got another boost on Sep. 2.  This time the stock soared another 79.8%, following the publication of a CBS News article, titled, “Ferguson, Missouri cops start wearing body cameras: report”, where comments made by McCaskill to Missouri’s Springfield News-Leader were again published for a nationwide and global audience.

Now The Washington Post has just reported that the U.S. Justice Department has initiated an investigation into the matter of the shooting of Michael Brown.

A compelling and enduring story, the 147,000 petition signatures to the White House demanding police wear video cams, and the inevitable legislation to follow could lead to a codified revenue stream to Image Sensing Systems.

The catalyst for a bull market in ISNS had been borne in Ferguson.  Surveillance of police encounters with the public may soon become commonplace.

Valuation Calculation

A look at Image Sensing Systems second-quarter P&L shows that the gross margin of total revenue runs at a robust 71.8% rate.

Using the second-quarter’s combined costs of Research and Development R&D and Sales, General and Administrative (SG&A) of $5.5 million, we calculate that the company needs to generate an additional $5.6 million of revenue per quarter (nearly double) to support the current stock price of approximately $7.50.

The assumptions made for the approximation include a continuation of the company’s 71.8% gross margin, relatively steady R&D and SG&A budgets, and a market willing to value ISNS at 15-time after-tax earnings.

With the public push in Washington for more police surveillance of themselves reaching critical mass, it’s highly likely that U.S. municipalities will be coerced into enforcing expected mandates regarding police self-surveillance.

With only 4.98 million shares outstanding, Image Sensing Systems needs to only report $2.5 million of net income to achieve an EPS of $0.50.  And with the additional billions of dollars that come from nationwide initiatives, Image Sensing Systems only needs a small fraction of Washington’s grants to make ISNS traders very happy.  (See second-quarter earnings report here)

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