Buy Sturm, Ruger and Company, Not Smith & Wesson

It seems like the U.S.A. presidential race is leading to an increase in gun demand. Due to the fear of future gun control laws, customers are fleeing to buy firearms, as a result of which, shares of Sturm, Ruger and Company (RGR), and Smith & Wesson (SWHC) have performed very strongly over the last few months.

However, it looks the rally has peaked as shares have stayed flat despite the onset of several positives. For instance, shares of Sturm, Ruger and Company have dropped around 5% despite the company reporting a stellar quarter, surpassing estimates on both earnings and revenue.

On the other hand, Smith & Wesson has also struggled to breach past its 52-week high of $30.59.

Background checks are soaring to record levels, and yet both the stocks have been struggled to move higher. The latest figures from the FBI show that last month was the 15th consecutive month of record background checks for gun sales.

The last July record was set in 2015, when background checks stood at 1,600,832, as opposed to last month’s 2,197,169. This massive increase will ultimately translate to a further increase in gun demand and is a positive for gun stocks. However, it seems like the market has failed to realize the true short-term potential of both these stocks.

I expect background checks and gun sales to continue increasing through at least November, which in turn will benefit both the companies. However, since Smith & Wesson is already trading pretty close to its 52-week highs, I don’t think it is an ideal time to buy the stock.

On the flipside, Sturm, Ruger has pulled back considerably despite posting strong results, and the pullback provides a great buying opportunity. The shares probably pulled back on the news that CEO Michael Fifer is leaving the company next year and will be replaced by COO Christopher Killoy, which seems irrational.

Given the increasing amount of background checks, the probability of Sturm, Ruger’s sales growing further in the near future is really high. Despite the rally, I don’t think all the short-term positives are priced in the stock, which is why I think investors should capitalize on the pullback by buying shares.

As for Smith & Wesson, I think the stock is currently a hold and investors should wait for a pullback to enter the stock or add to their positions. All in all, I expect both the stocks to continue rising and break the range barrier by November, thereby making them good picks.

Disclosure: No position

Published on Aug 12, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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