Changing My Stance on Gun Stocks

As my readers would know, I have been recommending investors to short gun stocks for a few months. Due to the overvaluation of Strum, Ruger & Company (RGR) and Smith & Wesson Holding Corporation (SWHC), and the overall dynamics of the gun industry, I had recommended investors to short or sell both the stocks.

Since then, Sturm, Ruger & Company has dropped about 20%, whereas Smith & Wesson has also plunged over 30%. While the stocks are still a tad bit overvalued, I think investors should consider closing their short positions.
In fact, in my opinion, I think both of the stocks have fallen too much, too fast.

Investors have priced in all the near term headwinds in the current share price. With both of the companies yet to release their earnings, I think investors should buy the stocks heading into earnings as I am expecting both the companies to release better-than-expected earnings.

The stocks have sold off recently following reports that a background check system run by the FBI showed struggling growth last month. However, investors who have been following the FBI’s checks for years would know that the number of checks for the month of May have always been less than April since 1999.

The checks slow down during the summer season, but investors should remember that both of the companies are expected to report double-digit sales growth in the upcoming quarter. As a result, I think investors can consider buying the stock, or buy call options for July. Better-than-expected earnings can drive the stock higher and buying call options with July 15 expiry can be the best way to play the stocks heading into earnings.

Stocks will regain some of the lost value around the earnings and the recent pullback is probably the best time to buy both Sturm, Ruger & Company, and Smith & Wesson.


Sturm, Ruger & Company, and Smith & Wesson are trading at 16 times and 14.90 times trailing earnings, respectively. Given the expected growth, both the stocks are a tad bit overvalued, but can move higher around the earnings. As a result, I think investors should buy both Sturm, Ruger & Company, and Smith & Wesson or call options with July 15 expiry heading into the earnings.

In the short-term, the chances of both the stocks recovering some of the lost value are high, which is why I have changed my stance on the stocks for the short-term.
Published on Jun 7, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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