Shares in Smith & Wesson Holding Corp (SWHC) and Sturm, Ruger & Company (RGR) rose sharply Monday, but apart from the questionable morality of trying to profit from a mass shooting, investors need to remember that the big gains in SWHC and RGR might not last long.
Predictably, RGR stock and SWHC stock jumped after the slaughter in Orlando because gun owners and would-be gun owners fear some kind crackdown that will limit access to firearms.
But if past is prologue, nothing will change and RGR and SWHC will give back at least some of their gains.
Maybe more this time. The long-term trend in SWHC and RGR has only been up. Smith & Wesson is up about 700% over the last five years. RGR increased 200%. Both stocks have outpeformed the S&P 500 by wide margins.
However, they have done so with some gut-wrenching volatility. Shares take off in the aftermath of a mass shooting and then eventually cool off. Timing is everything.
Another concern is that these companies are cycling against difficult comparisons.
Are SWHC, RGR at a Market Peak?
Earnings per share for both Smith & Wesson and Sturm, Ruger are forecast to decline next fiscal year. Analysts’ channel checks earlier this year suggested that sales of firearms were slowing.
Interestingly, SWHC stock and RGR stock were both negative for the year-to-date before the Orlando shooting. That suggests that share prices got ahead of fundamentals.
That’s probably true. Although the latest mass shooting will likely provide a boost to SWHC and RGR results, it will likely be short lived. At some point, the irrational exuberance will catch up to the market and the stocks won’t keep all of their gains.
It’s almost as if the valuations on these names are predicated on a steady stream of mass shootings. Even if the trend remains up, that’s an ugly way to make investment decisions.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.