Why Smith & Wesson's Shares Took Off

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 Smith & Wesson (Nasdaq: SWHC  ) were up 10% today after President Obama's re-election, because everyone now expects gun buyers to buy even more guns over the next four years than they did in his first four years.

So what: Despite occasional worries that President Obama will be coming after everyone's lawfully purchased guns, no such control measures have been put in place. That hasn't stopped record interest from gun buyers, which has pushed both Smith & Wesson and compatriot Sturm, Ruger (NYSE: RGR  ) to incredible stock-price growth that's been fully supported by financial fundamentals. After the pop, Smith & Wesson's P/E is still only 21.2, and Sturm, Ruger's is even more reasonable at 15.3. Extrapolating from the first four years offers investors a reasonable glimpse into the next two, which are likely to see the same ginned-up hysteria from the gun lobby and no real action from the White House.

Now what: The Obama Bounce is a well-known phenomenon for the major gunmaker stocks. In the past four years, Smith & Wesson has soared 306% -- but that pales in comparison with Sturm, Ruger's massive 664% gain in the same period. Although investors gave Smith & Wesson a slight edge today, Sturm, Ruger remains cheaper on a P/E basis and is also the only one of the two to offer a dividend. No matter which way you slice it, the high tensions over this election are likely to keep gunmakers' target audience eagerly buying firearms, in preparation for an apocalypse that's not likely to come. Smith & Wesson may not the massive growth opportunity it was four years ago, but it's still likely to have solid growth ahead of it for at least another year.

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  • Report this Comment On November 07, 2012, at 6:45 PM, pomdter wrote:

    Fast & Furious was put in place to give Obama an excuse to regulate guns, when the scandal broke, he had to give up on that dream. I would expect he will try again now that he is in lame duck mode, but I doubt he will make much progress.

  • Report this Comment On November 09, 2012, at 11:14 AM, neocolonialist wrote:
  • Report this Comment On November 09, 2012, at 11:18 AM, neocolonialist wrote:

    If the UN story is true, or proves out true, then that will be an interesting timing problem for Ruger, Smith & Wesson and other stocks in this field. Because IF the UN does succeed in controlling small arms in this country, as soon as something like this were to take hold I would expect these stocks to dive hard.

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