Smith & Wesson, Ruger Experiencing Losses After Slow Sales

Smith and Wesson stocks have been hemorrhaging in the last two months, due largely to lightning gun sales, and analysts believe it may get worse.

The above graph shows Smith and Wesson stock (SWHC) climbing until partway through March, then taking a nosedive at the beginning of April.

Smith and Wesson Has Lost Significant Value Recently

• It lost almost a third of its value in April and May
• It took a 5% drop on Monday, June 6th.
• It took an even worse 7% decline on Friday, June 10th when the softening on gun sales became apparent

Ordinarily, This Would Be the Point at Which Investors Bought into the Stock

Smith and Wesson has grown a lot since 2009—almost 900%. 

Usually, a decline in its price would simply signal investors to leap in and buy this crazy-growing stock while prices were low.

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This Time, However, it May Not Work Out That Way

Right now, the analysts think that the uptick in handgun sales that acted as an impetus for the prodigious stock gains of Smith and Wesson might have plateaued. 

The very same sales also shot its competitor, Sturm, Ruger & Co. (RGR)’s stock up more than 1000% in the same timeframe. 

It appears, looking at a graph of RGR, that the slowdown in sales also impacted Ruger:

The drops are not as sharp in March and April, but there is a sharp drop at the beginning of June. 

The numbers bear this observation out, as RGR dropped 7% to $59.98 per share on the same Monday that Smith and Wesson lost 5% and ended at $21.54 per share.

Handgun Sales are Still Growing, Just Not As Fast as Before

There are reliable proxies for gun sales which indicate that the sales are slowing. 

This would mean that Smith & Wesson and RGR won’t take off skyward again, and may even have reached a temporary peak.

Experts feel that the gun merchants could end up moving sideways for at least five months, with no guarantee of a rally afterward.

FBI Background Checks Show Slowdown Clearly

It makes sense that FBI background checks on potential gun owners would be a good proxy for actual gun ownership, and right now the story they are telling is not promising for Smith and Wesson. 

While the federal government did process 2.1 million applications this May, that represents a 13% drop from April. 

It’s also down from March and February.

The caveat with the background check readings is that they aren’t perfect. 

Some people don’t even pass, and some who do don't buy any guns, or buy more than one. 

But it’s considered a good measure nonetheless.

Gun Sales Themselves May Simply Have Peaked for the Time Being

The following chart illustrates recent spikes in gun sales and the sort of incidents that usually cause them:

Two events would appear to spike gun sales—terrorist/shooting attacks and President Obama winning elections. 

Most recently, a spike is seen that coincides with the attack in San Bernardino in December of 2015.

Analyst Cowen Believes that the Spike Around Sandy Hook Was Provoked By Fear that the Federal Government would Outlaw Assault Weapons

Cowen points out that everyone and their brother went out to buy the sort of semiautomatic firearm that was used in the attack. 

A similar fear may explain the spikes around President Obama’s elections as there seems to be a real fear that he will attempt to separate Americans from their firearms.

Ironically, This Suggests That if Donald Trump Were to Be Elected, Gun Sales Might Go Down:

• There would be no fear that he would attempt to enact legislation making guns illegal.
• Any political rhetoric about controlling guns would lose its bite with buyers knowing he had veto authority.
• A Hillary Clinton election would probably have the opposite effect.
• Analysts not only say that there was a surge in December partly because of liberal rhetoric for more stringent gun laws, but they suggest the surge is now fading.

Meanwhile, Analysts Have Several Concerns About Smith & Wesson the Company

Among others, Smith & Wesson is trading at 23 times earnings. 

It may warn investors that it can’t make its 2017 forecasts. 

Meanwhile, RGR pays a 2.5% yield, while Smith & Wesson offers no dividend, making one of them a clear winner for investors.

Conclusion

How the gun manufacturers do in the near future seems to be closely linked with how the gun market itself does. 

The gun market, meanwhile, would seem to depend on factors as diverse as well-publicized incidents of violence and who gets elected president.

It seems possible that the market will actually settle if Trump is elected and spike if Clinton is elected.

Like the election itself, only time and the American people will tell.