Gun stocks are starting to cool down after a bull run.
Although Americans were buying firearms throughout 2020, the figures peaked during the election season. Just to put things in perspective, the Federal Bureau of Investigation (FBI) conducted a record 39.7 million background checks for gun purchases in 2020, a nearly 40% increase year-over-year. In November, InvestorPlace‘s Ian Cooper wrote about gun stocks that were set to gain due to the Biden win. It has five picks that gained in the run-up to the inauguration. However, it’s time to book your profits and invest elsewhere.
Time will tell if the new administration will go ahead and limit the Second Amendment. Nevertheless, the 46th president is now in office. Therefore, the anxiety will subside with each passing day, and some of the major gun stocks are already showing signs of sluggishness.
In fact, three names stick out in particular. They are:
Now, let’s dive in and take a closer look at each one.
Gun Stocks: Sturm, Ruger & Co. (RGR)
Firearm sales reached an all-time high in 2020 as Americans reacted to the prospect of additional gun control measures under President Joe Biden’s administration. However, gun stocks are giving up ground as the new administration settles in. RGR stock, down 0.4% the past month month, is reflective of the trend.
The gunmaker is a direct beneficiary of the heightened tensions we saw last year. A small-cap stock, it delivered an earnings surprise of 43.3% in the third quarter of 2020. Additionally, net sales came in at $145.7 million, and diluted earnings per share (EPS) at $1.39, compared with net sales of $95 million and diluted earnings of 27 cents share in the year-ago period.
In commenting on the results, Chief Executive Officer Christopher J. Killoy said:
“Consumer demand showed no signs of letting up during the quarter as concerns about personal protection and home defense were stoked by civil unrest in some cities around the United States, the call, by some, for the reduction in funding and authority of law enforcement organizations, and the continuing COVID-19 pandemic.”
In the ultimate “Make Hay While the Sun Shines” situation, Sturm, Ruger & Co. closed its acquisition of substantially all Marlin Firearms assets in November. The agreement to purchase these assets emanated from the Remington bankruptcy, the second time in two years the 200-year-old maker of firearms filed for Chapter 11. RGR also issued a special dividend of $5 per share amid the pandemic.
However, I expect RGR stock to give up more ground. Over the last decade, it has had five years of negative earnings growth. Additionally, short interest is 5.96% of its float, as investors aggressively bet against this one.
Smith & Wesson Brands (SWBI)
Smith & Wesson Brands manufactures handguns, long guns, sporting rifles, shooting gear and suppressor products. It sells its products under several brands, including Smith and Wesson, M&P, Thompson/Center Arms, Performance Center and Gemtech. That said, its handguns are a favorite among Americans.
Collectively, it’s tough to argue against SWBI stock. Smith & Wesson a leader in firearm manufacturing. In the last 12 quarters, the company beat Wall Street’s EPS estimates ten times. Most recently, it reported a 118.7% increase in the second quarter of the fiscal year 2021. The gross margin came in at 40.6% compared with 28.4% for the comparable prior-year period. For all these reasons and more, the 12-month price target for SWBI stock is $22.40 per share, a 33.7% upside to current rates.
However, much like other constituents on this list, there are certain concerning issues. The MACD indicator has turned negative in the past week, a bearish signal among technical traders. Shares have pulled back almost 30% from their 52-week high in the last month. And finally, a significant percentage of shares — 11.04% of the float — are being shorted by investors betting against it.
Gun Stocks: Vista Outdoor (VSTO)
Vista Outdoor organizes itself into two segments: shooting sports and outdoor products. Shooting sports, the biggest revenue generator, includes ammunition, long guns and related equipment. It sells its products under the brand names Federal Premium, Blackhawk, and Hoppe’s.
Like others on this list, the domestic situation in the U.S. is driving sales and returns. In fact, VSTO stock has a return of 318% over the past year. But unlike the other two on this list, the stock is up almost 31% in the last month.
Moreover, VSTO stock has an excellent track record — reporting 10 earnings beats in the last 13 quarters. The company recently reported EPS of $1.10, a 71.9% earnings beat on consensus estimates of 64 cents per share. Also, the quarter’s revenue came in at $575.18 million, compared to the consensus estimate of $506.39 million. Looking ahead, the company offered sales guidance in the range of $510 million to $530 million, and an EPS outlook between 55 cents and 65 cents.
Due to the stable performance and outlook, VSTO stock hasn’t given up as much ground as some of the other ones on this list. However, I expect performance to weaken in the forthcoming quarter if the new administration decides to tinker with gun laws. However, barring that, the stock is a decent performer with an average price target of $33.78 per share — an 8.6% boost from current levels.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.