Are Gun Stocks About to Crash?

Gun stocks have proved to be winning investments over the last 15 months with the likes of Sturm, Ruger, & Company (RGR), and Smith & Wesson (SWHC) up roughly 150% and 75% respectively in the reference period.

Concerns regarding tighter guns regulation have caused a steep increase in gun sales, as a result of which, both the stocks have rallied considerably since the start of 2015. Although the meteoric rise has been impressive, I think investors shouldn’t get carried away, especially in case of Sturm Ruger as the stock’s valuation is too high.

After the 150% jump in Sturm Ruger’s shares, I think it’s time for investors to sell the stock as its risk/reward ratio is unfavorable and the stock has limited upside.


Strum Ruger is currently trading at a forward P/E ratio of 45.55, whereas the P/S ratio also stands above 2.
The stock is clearly very expensive given that its growth is expected to be slower than that of Smith & Wesson’s. Analysts are expecting Sturm Ruger’s revenue to grow by just over 8% in FY 2016 and then by 2.5% in FY 2017.

Given Sturm Ruger’s towering valuation, I don’t think the tepid growth will hamper its valuation and push the stock a lot lower. With a market capitalization of over $1.33 billion, I don’t think Sturm Ruger can afford to report lukewarm revenue growth, which is why I think investors should consider booking profits by selling the stock.

In addition to the high valuation, investors should remember that both Sturm Ruger and Smith & Wesson rallied in a similar way back in 2013 due to similar market conditions after the Sandy Hook shooting. However, the stock plunged in 2014 after sales peaked and both the companies struggled to report any more growth.

Given the similarities between both the incidents, I think investors should be cautious about Sturm Ruger now that the stock is up 150% in about 15 months.


I think it time for investors to sell Sturm Ruger as I believe the stock is way overvalued. With a trailing P/E ratio of over 45, I think Strum Ruger has little-to-no upside room left. Hence, I think it would be safer for investors to cash in on the stock while its valuation is stretched. Moreover, Sturm Ruger witnessed a similar rally in 2013, only to come crashing back to reality in the following year. Given the similar circumstances, I think investors should consider selling Sturm Ruger now.
Published on Mar 1, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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