Several gun stocks could be in trouble. Mexican officials have been complaining for decades that lax U.S. gun control is the main culprit for destructive bloodshed in their country. Mexico has recently moved its campaign into U.S. courts, filing a lawsuit against ten gun companies, including Smith & Wesson Brands (NASDAQ:SWBI), Sturm, Ruger & Company (NYSE:RGR), Colt, and Glock.
The Mexican government argues that these companies “wreak havoc in Mexican society, by persistently supplying a torrent of guns to the drug cartels.” The lawsuit cites that 70 percent of guns traced in Mexico come from the U.S. and seeks at least $10 billion for damages.
Numerous academic research has been published on the topic of factors behind gun violence in Mexico.
“Mexican drug trafficking organizations are the largest providers of illicit drugs to the United States,” wrote Laura Mehalko of Boston College. “The U.S. government estimates that nearly ninety percent of all weapons used in the drug war originate in the United States. This Note argues that arms trafficking has been facilitated by current U.S. gun control policy, and it will likely continue without a foundational shift in either U.S. or international policy.”
Although the lawsuit is likely to continue for months, if not years, investors in gun stocks may not be patient enough to wait for the result of the legal challenge. Therefore today, I’ll discuss three gun stocks that are likely to come under pressure in the near term.
U.S. Sales Have Been Booming
Meanwhile, in the U.S., concerns about stricter enforcement of gun control and new firearm legislation, big-city riots and calls to “defund the police” led to a surge in gun and ammunition purchases in the past year.
The increasing number of background checks performed on firearms sales also contributed to the buying frenzy. In 2020, gun sales hit a record with an estimated 8.4 million people making their very first purchase last year.
However, the boom in gun stocks has been fading away in 2021, as investors start to question the upside in the industry during the Biden administration which wants to focus on gun control legislation.
As a result, share prices of gun stocks could easily fall from their current levels in the coming months, reflecting market expectations for a slowdown in gun sales as well as increasing market saturation in the industry.
With that information, let’s look at the three gun stocks that investors may consider selling in the coming months:
- Olin (NYSE:OLN)
- Smith & Wesson Brands
- Sturm Ruger & Company
Gun Stocks: Olin (OLN)
52 week range: $9.67 – $51.04
Dividend yield: 1.63%
Clayton, Missouri-based Olin manufactures chemical products and ammunition. It operates through three segments: Chlor Alkali Products and Vinyls, Epoxy, and Winchester, which sells ammunition and accessories under the Winchester brand.
Olin announced Q2 2021 results in late July. Total revenue increased 79% year-over-year (YOY) to $2.22 billion. Net income came in at $356 million, or $2.17 per diluted share, compared to a net loss of $120 million, or 76 cents loss per diluted share, a year ago. Cash and equivalents at the end of the period stood at $273 million.
“As previously forecasted, the second quarter adjusted EBITDA did exceed the first-quarter adjusted EBITDA by $119 million, or 27% excluding the one-time benefit from winter storm Uri in the first quarter,” said CEO Scott Sutton. “We also forecast that the third quarter adjusted EBITDA will exceed the second quarter as well.”
Strong pricing power in Olin’s Chlor Alkali and Epoxy segments combined with robust ammunition demand is expected to fuel top-line growth in the coming quarters.
OLN stock has rallied almost 100% year-to-date (YTD). It currently trades shy of $50. Despite gaining 330% over the past 12 months, in valuation terms, Olin looks undervalued at a forward P/E of 7.50 and current P/S of 1.07. However, the shares could see profit-taking soon.
Gun Stocks: Smith & Wesson Brands (SWBI)
52 week range: $14.50 – $39.61
Dividend yield: 1.32%
Springfield, Massachusetts-based Smith & Wesson is a leading firearms manufacturer worldwide. The company is well-known for handguns, including revolvers and pistols, long guns, sporting rifles, shooting gear, and suppressor products.
Smith & Wesson released the fourth quarter and FY21 results in mid-June. Net sales were $323 million compared with $193 million for the prior-year quarter, an increase of 67% YOY.
Quarterly adjusted net income was $89.6 million, or $1.71 per diluted share, a considerable increase from $27.5 million, or 50 cents per diluted share, for the comparable quarter last year. Cash and equivalents at the end of the period stood at $113 million.
“Our employees more than doubled the prior year sales, passed a milestone of $1 billion in revenue, and by every financial and operating metric, have delivered the most successful year in the 169 year history of the company,” said CEO Mark Smith regarding the results.
Two years ago, SWBI shares were trading around $5. Since then, the bulls have had the upper hand. The shares rallied 70% in the two weeks following the announcement of its upbeat earnings report, hitting a record high of $39.61 on July 1. Now, they are hovering around $23.50.
Given the uncertainty fueled by the recent lawsuit filed by the Mexican government, it might be too soon to hit the “buy” button. The current P/S ratio stands at 1.29.
Gun Stocks: Sturm Ruger & Company (RGR)
52 week range: $58.70 – $92.49
Dividend yield: 3.86%
Southport, Connecticut-based Sturm Ruger has two operating segments: firearms and castings. It generates most of the revenue from the firearms segment.
Sturm Ruger released Q2 2021 results in early August. Total revenue was $200 million compared with $130 million for the prior year quarter. That marked an increase of 54% YOY.
Net income more than doubled to $44.4 million, or $2.50 per diluted share. A year ago, the numbers had been net income of $18.6 million, or $1.05 per diluted share. Cash and equivalents ended the quarter at $23.6 million.
“The dedication and commitment of our over 1,900 hardworking employees resulted in our seventh consecutive quarterly increase in production, and the continued reduced level of Ruger inventory at the independent distributors and in our warehouses is indicative of strong consumer demand for our firearms,” CEO Christopher J. Killoy remarked following the release of the results.
Ruger sells firearms only to federally licensed firearms dealers. About 1.95 million of its firearms were sold from distributors to retailers in 2020. That metric was one of its best topline performances so far in its history. However, political, regulatory, and legal risks constitute potential headwinds.
RGR stock hovers at $80, up more than 24% YTD. A potential decline toward $75 or even lower would improve the margin of safety.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.