Gun Stocks: This Hidden Factor Is Giving SWHC an Edge

by Jim Woods | March 6, 2014 2:35 pm

Gun Stocks: This Hidden Factor Is Giving SWHC an Edge

The term “unexpected” and its variants are a favorite on Wall Street. When a company reports unexpected strength in sales and/or earnings or its outlook, a stock usually responds positively.

That was certainly the case on Wednesday as gun-maker Smith & Wesson (SWHC[1]) announced much better-than-expected fiscal Q3 revenue and earnings. ThGun Stocks: This Hidden Factor Is Giving SWHC an Edgee company also raised its fiscal Q4 and full-year outlook.

The unexpected Q3 metrics — which revealed a 7.1% year-over-year jump in revenue and a 63% boost in year-over-year EPS — prompted buyers to reload on SWHC stock, sending shares up some 16% in the session. The move higher in SWHC stock was amplified by the fact that, over the past two months leading up to Wednesday’s spike, the shares were actually down some 13%.

smith185 Gun Stocks: This Hidden Factor Is Giving SWHC an EdgeThe decline in SWHC leading up to its third-quarter earnings release was mirrored by rival gun stocks like Sturm, Ruger & Co (RGR[2]). RGR stock was down nearly 14% year-to-date through March 4, but unlike SWHC, RGR stock misfired due to “unexpected” weakness in its most-recent quarter.

The largest gun maker in America said its Q4 earnings per share actually rose 33% year-over-year, but the $1.33 per share the company logged in the quarter came in below what Wall Street had expected (there’s that word again — “expected”), and that number represented the first earnings miss for RGR stock in four years.

There was a already growing feeling of pessimism in gun stocks leading up to the RGR and SWHC earnings reports. The chief reason for the pessimism was the decline in the number of federal firearm background checks since November. That metric is a leading indicator of sales strength for  gun stocks, and as the numbers slid, so too did the price of SWHC stock and RGR stock.

Interestingly, there is a bid in gun stocks, and particularly SWHC stock, that I don’t think Wall Street fully understands.

The Hidden Factor for Gun Stocks

That bid is what I call the Second Amendment bid, which is the continuous desire for Americans to own firearms used to secure and defend themselves, their property and their liberty. And it has a huge effect on gun stocks.

The type of firearms used for this purpose, so-called self-defense and home-defense weapons, are the bread-and-butter of Smith & Wesson, much more so than Ruger. In its quarterly statement, SWHC said it saw handgun sales spike some 30%, with particular strength in the most concealable, combat-style pistols in its M&P Shield line. Sales of these lightweight, polymer construction pistols, along with SWHC’s revolver lines, are what pay the bills at Smith & Wesson.

Conversely, in the case of RGR, much of the company’s sales are in sport firearms, such as long rifles and shotguns used for hunting. Now, there’s nothing wrong with hunting and sport shooting, but long rifles and shotguns aren’t the target of gun control groups. So gun stocks that focus on those firearms are less affected by the Second Amendment bid.

It’s access to the military-style “assault weapons,” as well as the high-capacity magazines in combat-style pistols such as those made by SWHC, that many Second Amendment rights advocates (myself included) fear will be curtailed by overreaching federal and state laws.

This Second Amendment bid continues driving sales higher, and that’s particularly good for SWHC stock, and to a lesser extent RGR stock. Until Wall Street fully understands this, I think any significant selloff in either of these gun stocks shares represents a buying opportunity.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities. He does, however, own multiple products from SWHC.

Endnotes:
  1. SWHC: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWHC
  2. RGR: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGR

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