Has Smith & Wesson Peaked?

I have been very bullish on gun stocks and especially Smith & Wesson (SWHC) over the last few months. I recommended buying the stock or buying $30 call options when the stock was trading near its 52-week lows. Since then, Smith & Wesson has shot up close to 40% whereas the call options are up 300%. I believe investors who have witnessed gains by following my buy recommendations should start booking profits.

Strong earnings

The primary reason for my recent bullishness was the strong gun sales trend.
Shares of Smith & Wesson had pulled back considerably on the back of weak May background checks, which has historically been a slow month. In the latter months, it was established that gun sales trend is going to stay up due to record growth in background checks.

As a result of a strong sales trend, Smith & Wesson reported stellar earnings last week. Smith & Wesson reported EPS of $0.57, easing past the analysts’ estimate of $0.53. The company also reported revenue of $207 million, recording a significant jump of over 40% year over year, and again surpassing the analysts’ estimate by a wide margin of $8.84 million.

For fiscal Q2, Smith & Wesson sees net sales of $220 million-$230 million, towering above the consensus estimate of $166.2 million. On the earnings front, Smith & Wesson expects Q2 non-GAAP EPS of $0.53-$0.57 as compared to the consensus for $0.35 per share. For the full year, Smith & Wesson forecasts sales of $900 million-$920 million, again way above the consensus for $778.4 million and EPS of $2.38-$2.48 as opposed to the estimate of $1.94.

Given the quarter Smith & Wesson has had, I was expecting the stock to jump at least 10%. However, as of writing, Smith & Wesson is up only 5%. With the stock trading close to its 52-week highs and failing to break past it despite reporting a stellar quarter, I expect it to face selling pressure in the coming weeks.

As a result, I think Smith & Wesson investors should start booking profits. Smith & Wesson has performed very nicely for investors over the last few weeks, and although I do think the stock’s fair value is above its current market price, I think its upward movement will be limited. I expect Smith & Wesson to face severe selling pressure when it crosses the $30 mark, and as a result, I would recommend investors to take their profits off the table.

Disclosure: No position

Published on Sep 6, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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