Image source: Smith & Wesson.

Investors in gun stocks have seen extraordinary long-term returns from their shareholdings, and both Smith & Wesson Holding (NASDAQ:SWBI) and Sturm, Ruger (NYSE:RGR) have produced impressive gains over the past decade. More recently, the two stocks have seen increased interest because of what's happening in the political realm, and the election campaigns both for the U.S. presidency and for Congressional posts in the Senate and House are putting gun rights and gun-control aspirations in direct oppositions. Such episodes have been an opportunity for Smith & Wesson and Sturm, Ruger in the past, and smart investors want to know if the recent performance of the two stocks is likely to continue. Let's look more closely at Smith & Wesson and Sturm, Ruger, with the goal of deciding which stock looks more attractive right now.

Valuation and stock performance

Smith & Wesson and Sturm, Ruger have both produced gains for investors, but Smith & Wesson's rise has been much more impressive. Since August 2015, Sturm, Ruger has seen its stock climb by just 8%, compared to a meteoric 73% rise for Smith & Wesson.

Given its strong run, Smith & Wesson might seem like it's probably overvalued compared to its chief rival. Yet when you look at some simple valuation metrics, the impression you get is much different. Comparing the two companies on trailing earnings, both Smith & Wesson and Sturm, Ruger trade at multiples of around 17. Moreover, when you incorporate future earnings expectations into the picture, Smith & Wesson looks like a better bet. Most analysts expect Sturm, Ruger earnings to fall next year, giving the stock a forward earnings multiple of 23. However, Smith & Wesson's growth path gives it a forward multiple of just 14. Based on those figures, Smith & Wesson looks like a better bet even with its strong stock returns.

Dividends and return of capital

On the other hand, dividend investors have only one choice when it comes to the two gunmakers. Sturm, Ruger pays a dividend that currently yields 3%, while Smith & Wesson doesn't pay a dividend at all. In its most recent quarter, Sturm, Ruger boosted its dividend by a penny per share to $0.49, following through on its commitment to pay shareholders a certain percentage of earnings each quarter. This leads to some dividend volatility, but it also results in more sharing of the company's success with shareholders.

In the past, both Smith & Wesson and Sturm, Ruger used stock repurchases to return capital to shareholders. However, the rise in share prices has dissuaded the two gunmakers from doing so recently, and neither Sturm, Ruger nor Smith & Wesson has reported any buyback activity so far in 2016. Based on these facts, Sturm, Ruger has a clear advantage over Smith & Wesson thanks to its dividend policy.

Growth and risk factors

Both Smith & Wesson and Sturm, Ruger have high hopes for continuing to grow, even though growth potential for the gun industry is always subject to the risk of increased regulation. For Sturm, Ruger, however, some of the excitement about the industry's opportunities has been tempered by concerns about the future leadership of the company. In its second-quarter financial report earlier in August, Sturm, Ruger's results looked solid, with sales growth of almost 20% leading to an increase of more than a third in earnings per share for the quarter. New products such as the American Pistol and the Precision Rifle contributed about a third of the company's overall firearm sales, and sell-through from distributors to retailers grew at a faster pace than overall background checks, suggesting market-share gains versus some of its competitors. However, Sturm, Ruger also announced that CEO Michael Fifer would retire next spring, with current COO Christopher Killoy taking over the top spot in May 2017. Investors responded negatively, and some worry that a change at the top will only compound some of the execution issues that have plagued Sturm, Ruger in the past.

By contrast, Smith & Wesson has moved forward aggressively. The company has benefited from the same positive trends in the gun market, but what has investors really excited is the fact that Smith & Wesson is looking to take a more comprehensive position in the sporting goods and accessories industry. With its purchase of Crimson Trace, which makes laser sighting devices, Smith & Wesson continued a plan that started with earlier purchases of accessories maker Battenfeld Technologies and knife specialist Taylor Brands. By developing a diversified portfolio, Smith & Wesson is looking to reduce its potential risk from gun regulation, and investors believe that move is a smart one even with current strength in firearm sales.

Overall, both gun stocks have plenty of room for future gains. However, based both on valuation and on strategic growth prospects, Smith & Wesson has better potential. Income investors will prefer the dividend income that Sturm, Ruger provides, but it will have to compete more effectively against Smith & Wesson in order to produce similar long-term future returns.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.