Fear and panic purchases of guns should abate with the election of Trump and Republican-led majority in the house and senate. Assumed is that 2nd Amendment rights will be protected and all. This is evidenced by the big drop, roughly 15%, in both the stocks of Smith & Wesson (SWHC) and Sturm Ruger’s (RGR) immediately after the election. A buy the rumor (of Clinton Presidency), sell the news (of Trump Elected) type of sell-off. Funny how valuations reset on a dime.
Speaking of valuations, it was estimated that both stocks would have slower sales moving forward. For 2016, analysts are forecasting 26% year-over-year growth for Smith & Wesson but 1% for 2017. Sturm Ruger’s revenue is expected to increase 13% for 2016 but decline 14% in 2017.
No wonder neither stock’s priced moved today despite a record-setting number of gun background checks processed this Black Friday. Despite the obvious increase in sales this portends, the expected forecast is dreary. Price stagnates as a result.
So why am I looking at gun stocks then? I’m curious: What if future guidance changes? Thursday Dec 1st, SWHC releases their earnings. Guidance will matter. The stock price of each has been all over the place in 2016. Wild swings. Not a clean chart for clear patterns. But the theme does does have three things going for it:
- Defense industry stocks as a whole are trading at roughly 19x earnings, making Smith & Wesson and Ruger’s 12x P:E ratio attractive. In addition, RGR has a 3.26 div yield.
- Short interest has increased almost 25% in November which could fuel a short covering rally if EPS surprises.
- Guidance could surprise so valuation would be reset again. See point #2.
What I don’t hope these gun stocks have going for them are looser background checks on people buying guns (ala Trump) and fear-mongering that motivates citizens to arm themselves against terrorists and such in our back yard. What I don’t hope these gun stocks have going for them are national racial and religious tensions escalating and with them gun sales.
But sentiment can drive investments as much if not more than fundamentals. Personally. I just like the potential of an oversold, short-covering rally.
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