Why Smith & Wesson Shares Turned Cold

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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 backfiring today, falling as much as 10% on a sector-wide decline after an analyst said gun buying may have peaked, and downgraded Smith & Wesson.

So what: Gun purchases had spiked in the aftermath of the Newtown massacre, as gun buyers rushed to increase their stockpile on fears of increased government regulation. But Scott Hamann of KeyBanc Capital Markets said he sees a meaningful slowdown in demand in the fourth quarter and the first quarter of next year. Hamann dropped his rating on Smith & Wesson from hold to underweight, noting its exposure to the AR-15-style assault rifle, which the Newtown gunman used, as he sees demand for that particular gun falling off.

Now what: It's surprising to see shares falling so much in response to Hamann's downgrade, as his analysis really isn't anything new. There was a clear cause to the spike in gun purchases, which was eliminated when the gun control bill written in response to the Newtown shooting died in the Senate in April along with the possibility of tighter gun laws. Guns are a durable good and, therefore, have finite demand, unlike bullets, for example; therefore, it only makes sense that gun sales would ease once the fear driving the purchases was gone. Smith & Wesson will report earnings on September 2. Analysts are expecting a per-share profit of $0.36, down from $0.44 in the quarter that ended in April.

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  • Report this Comment On August 15, 2013, at 8:19 PM, Turtleskater wrote:

    KeyBanc Capital Markets is wrong again!

    Why would gun permit registration increase during the vacation season and back to school time?

    If gun sales have peaked, then why have gun permits doubled in Newtown?

    Why would KeyBanc Capital Markets continue issuing false forecasts about the gun industry?

  • Report this Comment On August 15, 2013, at 9:38 PM, marder1 wrote:

    Hamman has been downgrading SWHC since $8, criticizING a firm running flat out, with $85M in the bank, and a PE less than 10 in a PE=17 environment--right the day before August option expiration and a 2% marketwide selloff, and right after SWHC gets a JUICY zillion dollar military contract. Hmmmmmmmmm. Does anybody check analysts portfolios for conflict of interest, or maybe, "uncle Fred" owns put options? I'm just speculating too. Guns are resilient, but many gun owners collect DOZENS with room for more. The only problem is getting engineers to innovate designs.

    A jobless (McJob/parttime) "recovery", threatened by tapering mortgage backed security buys, higher interest rates, threats to the fledgling real estate recovery, nutcases, terrorists, these things are getting worse, not better. Hammon was wrong before. He's doubly wrong now, the company has shown penchant to use that $85M for stock buybacks at $11. The damage slander has had today, stops at about $11.

  • Report this Comment On August 15, 2013, at 10:08 PM, wolfman225 wrote:

    I hope he's right in one thing. If the demand for the AR15 does decline and the price drops I'll finally be able to pick one up for less than the $900-$1000+ price tag they're currently sporting.

  • Report this Comment On August 15, 2013, at 10:41 PM, marder1 wrote:

    The premature death of the AR15 due to gun control zealots tried and failed at least three times in the last few years, the second amendment isn't going away very soon, and retreading that fear isn't going to work. Both political parties gave up, and for once, gridlock worked on behalf of freedom and the American people's ability to defend themselves, without having to bring a knife to a gunfight. For in the end, the bad guys don't obey the law, and if only bad guys have weapons,well, you get the drift. Remember, when seconds count, the police are only minutes away. Or am I being too obtuse?

  • Report this Comment On August 16, 2013, at 2:11 PM, wolfman225 wrote:

    ^I hope you're not just "whistling past the graveyard".

    Obama is set to sign the UN Small Arms Treaty before the end of the month. Should the Republicans and the few Conservative Democrats in the Senate roll over for the Internationalist's/Progressive's, the way could potentially be opened for a back door violation of our Constitution by the thugs in the UN and their accomplices in U.S. politics who seek the disarmament of civilians.

    It'll be too late once you start seeing blue helmets.

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SWHC $26.59 Up +0.77 +2.98%
Smith and Wesson H… CAPS Rating: ****