Smith & Wesson (SWHC)
This ideas was before the horrific events in Newton, Connecticut and I am placing the idea on hold for myself. The environment where I originally looked at the stock has drastically changed. While I think gun sales are still trending higher and while I think any serious talk regarding gun control will likely pull forward sales, I think it is only responsible to take a step back and let some additional information and clarity come before re-looking at the name.
Smith & Wesson Holding Corporation (SWHC) had been a hot company from late 2011 all the way through 2012. After reporting earnings after the close Thursday, SWHC opened higher Friday and then the sell off began, finally closing down over 9% for the day and more than 10% from the highs of the day. While that is not the type of action you are looking to see after a stock reports, this has been a hot name in 2012 and including Friday’s sell of is still up 127.5% YTD. SWHC raised estimates for 2013 (looks like even above analysts estimates) including an EPS range of $1-1.05 and Revenue to $550-$560M. In addition to upping earnings and revenue they also announced what is roughly a 3% share repurchase program which is slated to run until June 2013. A notable competitor to SWHC is Sturm, Ruger & Co. Inc. (RGR) whose stats I won’t post here but two have roughly the same amount of cash per share as a % of share price (both about 10%) and then RGR has a higher PE, PS, and lower analysts estimates for growth making SWHC look like a much better choice.
It looks as though in the recent history the company was plagued by a lack of consistent growth and even swings to a loss certain quarters. That can sometimes be a condition of the industry or an example of poor management. On the call, James Debney, Smith & Wesson Holding Corporation President and CEO, stated, “Our strong fiscal second quarter financial performance reflects the ongoing successful execution of our strategic plan, and accordingly today we are increasing our full year fiscal 2013 financial guidance.” That seems to mean that SWHC thinks it is different this time and that they have taken measures to devise a new strategy.
The last thing I like about this name besides a fair valuation and growth is the nature of their business. Sometimes you want to own something that provides you a hedge against bad situations and along with things like Gold and other commodities, I think you can add a gun manufacturer. Let me make a quick pit stop and note that I don’t look at stocks based on their business and my personal beliefs so I am not advocating or demonizing guns. I review companies based on their perceived ability to make me money and in this respect I think I have more of a Jim Cramer view of the situation where you invest/trade companies to make money and then you can use that money to then fund activities to fight that company, but first make the the money.
This is a name that has been on a tear since late 2011 and while still may be under valued for future growth is far from the bottoming play it was around the $3 range. It is important to understand where the stock has been to analyze the likelihood and risk of where you think it is going. I am watching support at $9 and then the 200 day SMA (magenta line) which is currently around $8.50. I also want to see how the MACD acts and really want to see a recycling style pattern emerge. One last note above, I noted how I compared SWHC to a competitor RGR and I do think there is an opportunity to do a spread trade between the two but that becomes slightly more complicated and timing of the spread becomes important.
