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Why This Gun Company Lost 11.9% in October

By Lou Whiteman – Nov 10, 2018 at 7:45AM

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Regulations, background checks, and a warehouse move are all weighing on this stock.

What happened

American Outdoor Brands Corp. (SWBI 0.97%) was firing blanks in October, with shares down 11.9% on the month, according to data provided by S&P Global Market Intelligence. It's been a rough couple of months for the Smith & Wesson parent, with both macro gun concerns and company-specific issues hanging over the shares.

So what

Shares of American Outdoor Brands had popped more than 35% in late August after reporting fiscal first-quarter 2019 results that came in well above expectations. That jump reversed what had been a rough year for the company's shares, but the stock has drifted steadily downward ever since.

American Outdoor and other gunmakers were hit in early October after President Donald Trump said that regulation to ban the sale of so-called bump stocks that increase the firing rate of semi-automatic weapons was on the horizon. The market is also absorbing data that suggests decreased interest in firearms, with adjusted numbers from the National Instant Criminal Background Check System (NICS) showing a 9.7% year-over-year drop in September and an 11.2% year-over-year drop in checks in October.

A gun secured by a padlock.

American Outdoor can't escape the ongoing gun-control debate. Image source: Getty Images.

American Outdoor is also in the process of moving to a new distribution facility in Missouri that eventually should reduce operating costs but for now requires the company to carry an inventory buffer, absorb moving costs, and add to customer service costs to assure a smooth transition.

Now what

While the moving costs are temporary and should not impact calendar 2019 results, demand issues could remain a concern. There has been a long-running worry among investors in firearm companies that fears of tighter future regulations leading up to the 2016 election pulled gun purchases forward, depressing current demand, and the NICS data in recent months has done nothing to quell that fear.

American Outdoor has attempted to smooth out the peaks and valleys of gun demand by adding related businesses like knife makers Taylor Brands and Bubba Blade and survival-gear manufacturer Ultimate Survival Technologies and by featuring high-tech accessories including laser sights, advanced aiming devices, magnifiers, and scopes. But those efforts are still in the early stages.

For now, American Outdoor Brands is still a gun company. Expect the shares to ebb and flow along with background-check data and the national gun-control conversation.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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