Will Gun Stocks Continue Crashing?

In a few of my last articles, I warned investors about the rally of gun stocks. Gun stocks have rallied hard on the back of rumors of gun control laws. The rumors have resulted in spiked gun sales, which in turn have led to the rally in gun stocks.

However, I cited many reasons why this rally could soon end and recommended investors to sell Smith & Wesson (SWHC), and short Sturm, Ruger & Company (RGR). While I expected both the stocks to fall considerably, which they have, I only recommended shorting Sturm, Ruger & Company because of the company’s lofty valuation.

While Smith & Wesson has fallen more sharply since the time I wrote the article, I still think it is lesser of the two evils.
Despite the 15% dip in Sturm, Ruger & Company’s stock, it is still trading at 20 times trailing earnings. Although Sturm, Ruger & Company’s fundamentals don’t look ridiculously high, I think the company is priced too highly given its slow expected revenue growth for the next few years.

Analysts are expecting Sturm, Ruger & Company’s sales to jump just by 7.6% in fiscal 2016. The target itself is very low, however, I think Sturm, Ruger & Company will fail to even meet this estimate. Investors shouldn’t expect Sturm, Ruger & Company to continue growing its revenue because I don’t think gun sales can continue surging. While the rumors of gun control laws have resulted in a strong surge in demand, the demand will prove to be short-lived as guns have a very long shelf life. Consumers don’t need to upgrade their guns with newer guns every year and if maintained properly, a gun could last for decades on end.

Thus, I don’t think Sturm, Ruger & Company will be able to meet its sales growth estimates that are already too low to justify its valuation. The same goes for Smith and Wesson. Hence, I think investors should be cautious about both the stocks.

Conclusion

Despite the 15% dip, I think Sturm, Ruger & Company is still a decent short. I think the stock could fall to under $60 in the coming weeks and investors can profit from it by initiating a short position. I still think Sturm, Ruger & Company has more downside potential than Smith & Wesson, which is why I would only recommend shorting the former.

 

 
Published on Apr 12, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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