Editor’s Note: This article was updated on April 8, 2021, to bring you more current information.
After a blockbuster performance in 2020 followed by a period of chop, now may be the time to sell gun stocks. Sure, there’s plenty in motion to fuel a continued rally in firearms names. With the Democratic Party back in control of the White House and putting a focus on gun violence, we could see a continued mad rush to buy guns, as seen during the Obama years.
On the other hand, this could already be priced into shares. Even as far back as mid-2020, investors may have been buying gun stocks in anticipation of President Donald Trump’s loss. Not only that, the Biden administration is planning to use executive actions to focus on gun control policies.
Sure, even with Democratic control, it’s possible sweeping gun control legislation may not make much headway. And the Supreme Court may be much more supportive of Second Amendment rights.
But given how much ground gun-control advocates could gain in the next four years, it may be good time to cash out of these three gun stocks:
Gun Stocks: Sturm, Ruger (RGR)
Besides gun control headwinds, there’s another factor that could hurt RGR stock in near term. When I last wrote about gun stocks, I discussed how valuation is another concern.
But with its share price pulling back since then (from nearly $90 per share, down to around $69 per share) is this still an issue?
Yes, to some extent. Valuation on a price-earnings or enterprise value/EBITDA basis may not look so rich by itself. At today’s prices, Ruger shares trade for a trailing price-earnings ratio of 13.5 and an EV/EBITDA ratio of 7.2.
However, with these metrics based on strong 2020 gun sales, sales could cool in the coming year. With analysts calling for earnings per share this year of around $5.23 per share, that would only be about 3% growth.
With the specter of gun control helping to keep demand steady, I don’t see a big move lower for this stock, like we saw after Trump’s 2016 victory. But in terms of additional gains, the ship’s likely sailed. If you bought Sturm, Ruger stock at lower prices, now’s the time to cash out.
Sportsman’s Warehouse (SPWH)
Calling SPWH a “gun company” isn’t 100% accurate. But, as InvestorPlace’s Josh Enomoto discussed Nov. 9, the company has big exposure to assault rifle sales. Sure, tighter upcoming restrictions could help bolster sales of assault weapons like the AR-15 in the coming year.
You can make the argument this near-term tailwind is more than priced into Sportsman’s Warehouse shares, which put in a huge rally in 2020 but aren’t looking nearly as strong in 2021. It may be posting blockbuster results right now, not only due to gun control fears, but lingering pandemic tailwinds as well. But going forward, we could see its impressive growth numbers take a breather.
Namely, due to Covid-19 vaccines returning things back to the “old normal.” If and when this happens, the recent increase in discretionary spending on outdoor activities could reverse course.
2020 may have been a banner year for the sporting goods retailer. But given much of its success was due to “one and done” events, I’m not sur we can count on a similarly strong 2021.
Smith and Wesson Brands (SWBI)
In 2020, investors in SWBI stock saw tremendous gains. At the start of the pandemic, shares traded below $6 per share. But, thanks to 2020’s increased gun sales, shares soared to prices as high as $21.49 per share in August.
However, even as gun sales remain strong, shares (which have since slid to around $18 per share) may not bounce back to prior highs. Why? Just like with its peer RGR stock, valuation may be stretched, even while on paper the stock looks cheap. Analyst consensus calls for much lower earnings in 2022.
Yes, Wall Street may be underestimating how much longer above-average sales numbers can last. However, even with high concern among gun enthusiasts, there are only so many handguns you can buy.
I feat that those buying SWBI stock today could be overestimating how long current trends can continue. After its impressive run last year, this may mean it’s time to take profit.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.