Why Smith & Wesson Shares Shot Down

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  ) are backfiring today, falling as much as 11% in a broad-based sell-off of gun stocks today following Friday's school massacre in Connecticut. Peer Sturm, Ruger (NYSE: RGR  ) was down 8% as well.

So what: Smith & Wesson shares had already fallen nearly 10% in the two previous trading sessions, which includes the day of the shooting. Today's fall seems to be a consequence of continuing outrage about lax gun laws, and news that a private equity firm would sell its stake in Freedom Group, the nation's largest gun maker and the manufacturer of the Bushmaster AR-15 rifle that was used in the deadly shooting. Cerebrus maintained a level of political correctness as the reason for the divestment, saying, "This decision allow us to meet our obligations to investors without being drawn into the national debate." California's treasurer also said he would attempt to divest his states pension fund's from any gun makers that violate California laws.

Now what: Owning gun stocks may be taboo for a while in the wake of such a horrific event, but from a financial perspective it's unclear if the shooting will have any long-term effect on the gun makers' business. Numerous politicians are calling for stricter gun laws, but time will tell if the political willpower exists to make any meaningful changes. Gun stocks tend to have an odd relationship with political developments. Shares of the manufacturers jumped more than 10% after President Obama's re-election, essentially on fears of tighter regulation, and sales had boomed in the preceding months for similar reasons. Whatever the cause of the regulation, it's hard to see that reaction changing. Given that effect, these stocks look like a bargain at today's prices.

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