Smith & Wesson's a Buy Ahead of 2nd Amendment Decision

Lately, the equities markets have been making huge swings. A few years ago, I likened a similar event to Oprah jumping on a trampoline – massive moves up and down. The description has never been more apt.

Many stocks are taking a beating because of news that would have barely attracted a headline just six months ago. Smith & Wesson (Nasdaq:SWHC) is one of those companies.

The gun manufacturer’s share price is down more than 75% from its 52-week high of $22.80 reached in August. The shakedown has been one of the market’s greatest overreactions.

The latest overly dramatic moment came on January 22 when the company announced it will temporarily sideline its practice of giving financial guidance until business conditions become less “unsettled.” Shares plunged by more than 20% on the news.

It was exactly this kind of reaction from the Street that caused company officials to halt the guidance practice. Each time Smith & Wesson discussed its outlook, its share price was slashed, whether it was warranted or not. The drama queens were controlling the company’s destiny. Not any more. Executives are rightly remaining tight-lipped until conditions rebound.

It’s a smart move. As I write, shares of the gun maker are trading for $4.17. Many analysts boast twelve-month forecasts that put share price back above $20 thanks to a strengthening market.

A big, profitable mistake

Granted, Smith & Wesson’s business has slowed. That slowdown is what kicked off this bearish plunge. But the market’s overreaction was way out of line. Each time the company revised its forecast, share price plunged lower and lower, no matter the news.

It has been one drop after the next, even though Smith & Wesson continues to sell and expand its products. Not only is the military pending contracts that could total $600 million (last year’s total revenues were just $283 million), but also an upcoming Supreme Court decision could jumpstart gun buyers. The entire industry will soar.

In just a few months, the nation’s top court will decide the fate of the Second Amendment. A favorable, pro-gun decision would be a great boost for the nation’s gun manufacturers. As one of the largest suppliers of handguns, Smith & Wesson would relish the news.

The decision will likely come in June of this year. In the months leading up to that date, I expect the firm to make a steady rise back towards the $20 mark. It will not take long for the profits to start pilling up. At $4 and some change, I think shares of Smith and Wesson are dirt-cheap.

When everybody else is talking about the dreaded “R” word, you have to take advantage of the opportunities laid in front of you. The equities market is a dramatic beast, prone to huge overreactions.

My recommendation is to buy shares of Smith & Wesson (SWHC:NASDAQ) at or below $6.00 and hold them for at least one year. A rebounding economy, a Supreme Court decision, and the market’s tendency to fix its mistakes, makes this a great opportunity to lock in some profits in a year that will undoubtedly be synonymous with recession.

Disclosure: Author has no position in stocks mentioned

Comments

[Ryan Freund:]

Amendment spelled wrong in title!

2008 Feb 01 09:56 AM

[Rocketman:]

It's my understanding that what is going to be decided is that if Washington D.C. residents can legally have guns in their homes. Admittedly if it is ruled that they can this will have a chilling effect on the entire nation's gun laws but I would reasonably assume that if the entire U.S. cities anti-gun are unconstitutional (which they clearly are) then there will not be a sudden increase in the number of individuals wanting to purchase legal guns.

2008 Feb 01 11:50 AM

[ballsschweaty:]

Author thinks the shares will quadruple in a year and yet he has no position.

Just another snake oil salesman.

2008 Feb 01 02:25 PM

[carlivar:]

Any gun manufacturer sounds good to me if we're going to be in Iraq for 100 years.

2008 Feb 01 04:46 PM

[Rifleman:]

Hey! Nothing ventured, nothing gained! I own SWHC and am buying more tomorrow.

2008 Feb 01 04:57 PM

[Analises_Dad:]

Rifle, I tend to agree with the potential price appreciation for the reasons stated in the article. I've recently purchased January 2009 $7.50 call options. If the price goes up to $60, I'll retire a year early. If the stock continues to fall (adverse Supreme Court ruling) I'm out with less than a $1k loss.

2008 Feb 02 07:49 AM

[fxtrader07:]

i don't want to think what the U.S.A will look like and what nightmare its citizens are going to experience should this recession get way deeper than the talkingheads on bubblevision want to make you believe. A country where every idiot essentially can walk around with a gun to take posession of the things he doesn't have but wants to have. add in the desperation in a deep recession and the stage is set for the rate of murders going through the roof.
Americans might call that freedom - over here in Europe we call it frightening and absolutely tragic. How many more high school amssacres do you need before you start thinking about it? And that the gun is not the solution to violence but an essential part of the problem.
Oh yes, the Rifle Association will tell you otherwise, sure. after all these arms dealers make a killing (pun intended')

2008 Feb 05 12:26 PM

[daffy:]

fxtrader07 ~ you clearly stated that you live in Europe. I suggest staying there since the United States of America is such a horrific place. There is nothing Americans like less than some pokey socialist from another country suggesting as to how we should live. The US is absolutely nothing like your part of the world, Americans chose not to live lke that mnay years ago, and little has changed. Let it be said that I despise european countries, and would never consciously spend money there. I also don't go run around and try and cram my opinions down your throats. Nor do I cram my opinions about Europe down people's throats here in this country. You have no clues whatsoever as to how our society works except from the socialist rags you use for bird cages there in Europe.

The Supreme Court cannot weigh in favor of gun control. It would create a situation where all law-abiding citizens would be then criminals, and to escape being a criminal, those guns would be pushed into the hands of the people who commit horrifc crimes. I suppose you would enjoy seeing armed militia searching every home, car , business, et cetera for every gun that is owned by the public sector? Sounds to me like you are a little caught up in serfdom and Stalin era socialism. Stick to your dole, it seems to be working wonderfully for you.

That being said, do you really think SWHC is going to go down in the next year? I am buying in.

2008 Feb 26 10:36 AM