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Editor's notes: As the recent surge in gun buying shoots itself out, SWHC's valuation may get caught in the crossfire. Portfolio Manager ROIC1 sees big downside as demand normalizes.

Opportunity

Smith & Wesson Holding Corporation (SWHC) is the third-largest gun manufacturer in the United States and the second-largest handgun producer, behind Sturm Ruger & Co. Inc. (RGR). Since mid-2005, unit production and sales for all types of guns have been growing at a brisk pace. The ATF estimates that annual gun unit production for US consumption grew at a 10.5% CAGR from 2005 - 2011. However, within the last 18 months, unit sales rates have not only hit unsustainable levels (growing more than 30% annually), they are downright absurd and look more like emotional demand patterns seen during a bank run or fad. SWHC's current valuation implies the company will grow even further to sustained...

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