Gun Stocks: 2 to Buy, 2 to Avoid (RGR, SWHC, OLN, OA)


Few issues in America provoke as many impassioned outcries — and a litany of countering voices — as firearms. Attempts by government agencies to curb the practice of the Second Amendment have only resulted in the opposite effect: an exponential jump in the sales of guns and ammunition.

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To the chagrin of President Barack Obama and to many of his proponents, firearms have become increasingly popular, as evidenced by the lift in gun stocks since 2011.

But will bullish momentum in the markets continue to push gun stocks even higher?

In one respect, publicly traded firearms manufacturers benefit residually from the current bull market in U.S. equities. According to a report from FactSet Research Systems, individual 401k accounts have approximately $2 billion worth of exposure to gun stocks. Millions of Americans — especially those with pro-gun control leanings — might actually be propping up gun stocks without even realizing it!

On the other hand, shareholder interests may not necessary align with retail interests. Persistent reports of government agencies — particularly the Department of Homeland Security — buying up an inordinate amount of ammunition have sparked fear among far-right wing organizations and conspiratorial elements.

Still, such fundamental drivers have not always resulted in huge gains in the markets.

To make money on gun stocks, just treat them with the same analytical rigors as with any other stock or commodity. Here are two firearm companies to avoid, as well as two names to stash in your arsenal.

Gun Stocks to Buy: Smith & Wesson (SWHC)

Gun Stocks to Buy: Smith & Wesson (SWHC)
Source: Source: JYE Financial, unless otherwise indicated

Referenced extensively in pop culture — perhaps most notably via the .44 Magnum wielded by fictional detective “Dirty Harry” CallahanSmith & Wesson (SWHC) is synonymous with gun culture.

Because of this notoriety, its products — such as its lineup of AR-15 rifles — receive unflattering attention whenever gun violence-related events shock the public.

Ironically, though, SWHC crossed the symbolic picket line 15 years ago, voluntarily cutting a deal with the government for the right to stay in business. It was this act of “treason” — at least from the eyes of some of America’s gun community — that nearly destroyed the company. While SWHC’s management team at the time was clearly taken aback by the negative response, their actions did underscore one critical factor: Smith & Wesson is business first, gun rights activist second.

SWHC has continued to build off its rally that began earlier this year, and while some of the momentum has waned, shares still remain up an astounding 60% year-to-date.

In addition, Smith & Wesson is riding favorable odds. With a 90-day average performance of 6.2%, similar trends in the past have yielded a 68% probability that the next three months will yield positive average returns of around 23.5%. However, SWHC’s beta of 1.24 indicates the risk of choppiness — no matter which way the market turns, it will likely be a wild ride.

Ultimately, SWHC is a pure play in gun stocks, so it might not be for everyone — but those who are risk-tolerant and fine with owning gun players, the potential returns are explosive.

Gun Stocks to Avoid: Olin Corporation (OLN)

Gun Stocks to Avoid: Olin Corporation (OLN)
Source: Source: JYE Financial, unless otherwise indicated

The enormous ramp in demand for firearms ammunition over the past few years — chiefly in response to international conflicts and legislative-based supply concerns — are a positive tailwind for Olin Corporation (OLN). In addition to its chemical distribution business, OLN also owns popular ammunition manufacturer Winchester, which serves the sporting community, as well as military and law enforcement agencies.

However, according to an IBISWorld market research report, overall demand for munitions may decline, regardless of the military implications of addressing geopolitical hotspots or the subsiding concerns among many American citizens of federal restrictions for the Second Amendment. These factors, while bullish in the short run, might temper long-term growth due to an influx of supply, especially from foreign competitors to OLN and other domestic companies.

Some technical headwinds in the markets could stymie OLN, too.

Similar to many other gun stocks, OLN rebounded sharply in the closing sessions of last year. But since early spring, shares have had difficulty building off previously established momentum. On a weekly chart, OLN looks to be forming a bearish head-and-shoulders pattern — a condition that becomes more precarious if it does not convincingly push past the $29 level, or the approximate “neckline” of the pattern.

OLN remains a solid company. But the technical factors at play suggest investors should wait for a correction before considering this gun stock.

Gun Stocks to Buy: Sturm, Ruger & Company (RGR)

Gun Stocks to Buy: Sturm, Ruger & Company (RGR)
Source: Source: JYE Financial, unless otherwise indicated

While it may not have the same pop-culture influence and sex appeal of SWHC, Sturm, Ruger & Company (RGR) is renowned for its workmanship and reliability. RGR also happens to be the “only full-line manufacturer of American-made firearms” — a major marketing point that no doubt appeals to large segments of its conservative and patriotic fan base.

It also happens to be having a fantastic 2015. RGR is up 60% year-to-date, powered in part by a solid Q1 earnings beat. Right now, Zacks ranks Ruger as a “strong buy,” its highest grade.

The technical action in the markets also support RGR stock’s bullish case. The roughly 30% drop in Ruger’s share price between the summer and winter months of 2014, followed by its subsequent rally, has created what could potentially be a cup-and-handle formation. Having passed the cup phase, RGR investors will be looking carefully to see if it can break out of its handle, or the consolidation phase. If so, the technical theory suggests that the breakout move could be fast and furious.

As with the other gun stocks, RGR is certainly not for the faint of heart. Still, Ruger is on the doorstep of what could be a profitable run.

Gun Stocks to Avoid: Orbital ATK (OA)

Gun Stocks to Avoid: Orbital ATK (OA)
Source: Source: JYE Financial, unless otherwise indicated

Establishing lucrative networks within the burgeoning defense and aerospace industries, as well as the ever-popular pro-gun community, Orbital ATK (OA) is a fundamental analyst’s dream.

Zacks Equity Research and several other Wall Street firms are gaga over OA stock, and frankly, who could blame them? Combining the technological prowess and business acumen of Alliant Techsystems and Orbital Sciences, OA is poised to become a behemoth in the markets.

But as the old scriptural saying goes, to those that have been given much, much is expected.

OA’s coming-out party on Wall Street was solidified with an earnings beat for the fourth quarter of fiscal year 2015. However, sales were not as impressive, declining against the previous year.

While a partnership may double an entity’s assets, in many ways, it can also double the competition.

OA investors also are finding out that a merger is not without its challenges. Since surging from the middle of December 2014, OA stock has met obstinate resistance at the $80 level, beginning in March of this year. Subsequent attempts to push past this barrier have been met with declining degrees of success, forming a bearish trend channel.

Should OA fail to hold support at approximately $73, it could be a very long and painful drop.

While Wall Street continues to sing its praises based on a promising future, OA stock has some near-term challenges that should worry investors.

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

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.

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