Which Way Will Gun Stocks Aim Next?

by Jim Woods | June 10, 2013 3:37 pm

Whenever you’re talking about anything that has to do with firearms, the last thing you want to be is aimless. Yet aimless is a good way to describe the trading action in gun stocks of late, as the two major players — Smith & Wesson (SWHC[1]) and Sturm, Ruger (RGR[2]) — have been firing blanks for several weeks.

The latest lull in the sector comes after months of headlines that pushed customers into gun stores, and pushed the earnings of both companies substantially higher during the past several quarters. The threat of new federal gun legislation — including a potential ban on so-called “assault weapons” — and the creation of new federal background checks were the fear factors that sent gun lovers, Second Amendment advocates and just average citizens who want exercise their rights on a firearms buying binge.

Trend-following traders also took aim at the SWHC and RGR, as the fast money always loves a good catalyst, a good story and a hot sector. Indeed, the gains in both of these stocks over the past couple of years have been incredible, with SWHC up 189% during the past 24 months while RGR has shot 137% higher during that time.

More recently, however, the passion for gun stocks is on the wane, as SWHC shares are down nearly 7% during the past three months while RGR has misfired to the tune of about 16%.

For traders and investors trying to gauge the sector’s future, the targets are anything but clear.

The chart here of SWHC shows the stock trading below its 200-day moving average. That’s generally a bearish sign; however, the stock has made gains in May, and it recently broke back above its 50-day moving average.

[3]

I suspect the current trading in Smith & Wesson shares will continue to bounce around these levels until the company reports earnings June 25. If we see a strong earnings report — and I suspect that we will — the stock has a very good chance of blasting back above its 2013 closing high of $10.28 set in early March.

One reason to suspect that Smith & Wesson will post strong earnings is because that’s precisely what Sturm, Ruger did on April 29. That’s when RGR reported a stellar 53% increase in net income during Q1 — a gain that came largely as a result of a 39% jump in revenue to $155.9 million. That’s a whole lot of guns sold in just three months, and that strong demand represents a fundamental bid still present in the sector.

Unfortunately for RGR shareholders, any uptick from that great earnings report has since waned, as shares have fallen so far in June. In fact, the chart here shows RGR sliding below its 50-day moving average and trading just slightly above its 200-day moving average.

[4]

Interestingly, this trend is almost the opposite of SWHC, which as previously mentioned has been edging higher of late.

For both SWHC and RGR, we could be at a pivot point in terms of investor appetite for this largely headline-driven sector. Fundamentally, the earnings are there to support a bullish outlook. Yet Wall Street often is driven by emotion, expectations and headlines, so if the gun debate is on the shelf for now — and it certainly appears to be — the fast money is likely to find another target.

If this is the case, we could see firearms stocks remain in reload mode.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/06/which-way-will-gun-stocks-aim-next/

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