It's clear the stock market doesn't understand the gun market. After American Outdoor Brands (NASDAQ:SWBI) reported fiscal fourth-quarter earnings two weeks ago, shares of the Smith & Wesson owner tumbled 10% and dragged rival Sturm, Ruger (NYSE:RGR) down with it. Although both recovered somewhat by the end of the day, their stocks remain below the gains they made in early June.

Ostensibly the reason for the decline is because of American Outdoor's disappointing guidance for the year. Despite having reported record results for the period, the gunsmith said a promotional environment had likely pulled sales forward, meaning the coming year would be weaker. But for anyone who has been watching, this really shouldn't have come as a surprise, though as we've seen time and again Wall Street is constantly shocked by gun industry developments both good and bad.

A woman receiving firearms training.

Image source: Getty Images.

Still targeting growth

American Outdoor Brands reported net sales of $229 million, a 3.6% increase from the year-ago period, but up almost 25% for the full year to $903 million. Firearms sales for the quarter fell 7.6% from the year-ago quarter to $189 million, pretty much in line with the 7.8% drop in FBI criminal background checks witnessed between February and April. Although not to be seen as a one-to-one proxy for gun sales, the law enforcement agency's National Instant Criminal Background Check System (NICS) is seen as a barometer for demand.

We knew going in gun sales were down from last year, the single greatest year for background checks and gun sales since the FBI started tracking the data in the late-1990s, but when you compare it to 2015, the previous record year, background checks are running 20% higher this year. Just as an economic depression might not be as bad as the Great Depression doesn't mean it's not a severe downturn, gun sales that didn't match the biggest year ever doesn't mean we're not still in a sales boom.

Year to date NICS background checks 1999-present.

Data Source: FBI. Chart by the author.

And though it's true as American Outdoor Brands says that it might experience softness in sales because it's "operating in a heavily promotional environment that we believe is very likely to continue," that too was not a surprise.

Retail wreckage

Two months ago Gander Mountain declared bankruptcy, and Camping World (NYSE:CWH), which won a bankruptcy auction for the sporting goods chain, has made a pointed effort to de-emphasize guns. Rebranding the company as Gander Outdoor, Camping World CEO Marcus Lemonis critiqued Gander's prior attempt to become "America's Gun Superstore" as misguided. He wasn't doing away with firearms at the stores, but they were not going to be as prevalent.

Coupled with Cabela's (NYSE:CAB) own financial troubles that led it to being acquired by Bass Pro Shops, as well as Dick's Sporting Goods (NYSE:DKS) anticipating Gander Mountain's liquidation sales having a negative impact on its own, and it should have been obvious sales might take a breather.

Now analysts are forecasting an extended hiatus in sales because of near 30% increases in background checks in June and July last year following the shooting at the Pulse nightclub in Orlando, Florida. Yet although tragic incidents like that do spur some people to buy a gun (or another one), it's not so much domestic unrest, acts of terrorism, or even potential gun control legislation that moves the vast majority of sellers.

A man at a shooting range aiming at a target.

Image source: Getty Images.

Gun sales boom ahead

Research from the National Shooting Sports Foundation suggests the real reason gun sales are growing is because more people are entering the sport, particularly target shooting. According to the Foundation, the number of individuals participating in target shooting jumped 44% between 2009 and 2016 to 49.4 million people, and the greatest growth is being seen in women shooters.

While concern for personal safety may have led a person to consider buying a gun, and the number of concealed carry firearms sold suggests they have been particularly popular -- American Outdoor said its M&P Shield pistol has become one of the most popular concealed carry firearms in the market after shipping its two millionth gun -- they're sticking around because they enjoy the shooting sports. It's enjoyment of the sport, and not fear, that is spurring growth.

That means the upward trend we've seen -- notwithstanding the year over year comparisons -- will continue, making American Outdoor Brands stock a good one to buy now. The gunslinger trades at less than 10 times earnings and 11 times next year's estimates, and shares are offered at a very discounted 13 times free cash flow.

Analysts still expect the gunmaker to grow earnings at 15% annually for the next five years, and it remains financially strong. It's been acquiring a passel of businesses that offer ancillary products and services to the shooting sports, most recently a suppressor manufacturer that could help launch it into the forefront of the industry if Congress, as expected, passes legislation that makes buying a suppressor, not such a rigmarole.

Investors who take advantage of the pullback in American Outdoor Brands stock following the 40% gain it made from earlier in the year would be on target for hefty 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.