August 15, 2012
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of gun maker Smith & Wesson (Nasdaq: SWHC ) shot lower by as much as 11% earlier in the trading session after receiving an analyst downgrade.
So what: Both Smith & Wesson and its rival, Sturm, Ruger (NYSE: RGR ) , were downgraded this morning by KeyBanc Capital Markets. Smith & Wesson was dropped to "hold" from "buy," while Sturm, Ruger was taken to "underweight" from "hold." The reasoning behind the move, according to KeyBanc's covering analyst, is that gun maker profitability may have peaked, and the research firm questions whether these firearm manufacturers can meet elevated expectations after such hefty runs in their share price.
Now what: As usual, we need to remind ourselves not to let a one- or two-day analyst move affect the long-term thesis we have on a stock. What we do know about Smith & Wesson is that it tends to be a very cyclical play -- i.e., it will move up when the economy is booming, and it's usually a good time to sell when the economy is weakening. With GDP growth a paltry 1.5% in the U.S. in the second quarter, KeyBanc's concerns could very well be justified, and with the stock trading at close to six times book value, there isn't much room for error in the company's coming quarterly report.
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