Shares of Smith & Wesson (SWHC) have been making a habit of constantly exploding higher after earnings as the Springfield, Massachusetts based company once again reported record sales of firearms and an increasing backlog of future orders. Despite the rocky markets that investors have seen on disappointing job data, shares of Smith & Wesson have been holding up after another blowout quarter as the company produced record annual units, annual cash, net sales and a firearm backlog that exceeded expectations. The last time I introduced readers to investing in Smith & Wesson was on March 13, 2012 in an article titled, "Trading Options On Smith & Wesson: Still A Force To Be Reckoned With" and despite the almost 20% jump in one day I reminded investors that this massive increase in shares of Smith & Wesson wasn't a fluke. Typically when a stock makes a big move higher with earnings being a catalyst, I am looking to lock in my profit and enjoy the victory. But, I believe once again that Smith & Wesson will continue to grow through robust earnings and shares can continue to climb higher. Despite the large increase in the share price of Smith & Wesson since June 28, 2012 I am still bullish on the largest manufacturer of handguns and an idea to trade Smith & Wesson using options.
On November 14, 2011 the CEO of Smith & Wesson P. James Debney gave an exclusive Wall Street interview and in the interview P. James Debney told listeners that NICS numbers (National Instant Criminal Background Check System) is a primary indicator that everyone has to go through prior to purchasing a firearm. In my opinion an individual that is having their background checked isn't automatically buying a firearm, but the increasing NCIS numbers can help validate the growth in sales of firearms for Smith & Wesson. In the link here this shows investors Total NCIS Background Checks from November 30, 1998 to April 30, 2012.
When looking at the last column investors will see that Smith & Wesson has seen more background checks this year compared to last year and the background checks have constantly increased over the years. There are a number of reasons that can attribute to an increase in the NCIS numbers. There are a variety of Gallup polls that point to increasing numbers of women purchasing firearms and not only for protection, but for recreational uses. The balance between women and men firearm owners according to Gallup indicates that 52% of men have a firearm in the house and 43% of women own a firearm in the house and both of these results are higher than last year. Another reason is that consumers are purchasing more than one firearm as sales for handguns have remained strong with net sales for Smith & Wesson up 27% from the same quarter last year. Finally, with the Presidential election coming up soon this could contribute to increased background checks as "fear" over possible changes in gun laws could ramp up sales. In my opinion it's too early to decide on how the Presidential race is going to affect Smith & Wesson since jobs and the future of The Affordable Health Care Act are more important issues at the current time.
Besides sales to consumers who meet the qualifications to own a firearm, Smith & Wesson also manufactures and sells assault weapons, handcuffs and knives to various law enforcement agencies in the United States. With many state and local budgets getting slashed it can often be tough to sell to various law enforcement agencies. When taking a look at Smith & Wesson's management team investors will notice that this team carries strong sales, marketing, consulting and legal experience. Sales are increasingly important since any new gun laws can hurt Smith & Wesson. Sales tend to be cyclical with Smith & Wesson and since 2011 Smith & Wesson has been successful at converting various State Police agencies to the M&P Pistol. The M&P handguns and rifles have contributed to strong sales as noted in the company's fourth quarter fiscal 2012 financial highlights. The S&P series has greatly improved compared to the previous Signa series with improved safety features and these weapons can be customized to meet an individual's needs.
With Smith & Wesson's recent quarter behind us and another quarter where shares of Smith & Wesson have dramatically increased, I am looking forward to the next quarter and staying bullish. When taking a look at a chart of Smith & Wesson in the last six months investors will notice that over the last three earnings reports the share price has continually increased. The last time I wrote about Smith & Wesson I advocated that investors should be patient and wait for pullback before making a move. On a technical level, shares of Smith & Wesson in the last three earnings reports jumped above the upper bollinger band and then slowly came within the upper Bollinger band then flattened out. If investors believe that history will repeat itself then I would be patient and let the stock selloff, but be prepared to buy. If shares of Smith & Wesson get closer to the $8 level, this is a level where I am comfortable with buying as the stock would have a significant pullback.
Here is an option play on a pullback in Smith & Wesson:
Trade Idea #1
Vertical Call Spread
Buy (1) Sept $8 Call = 1.60 (1.60 x 100 = $160)
Sell (1) Sept $10 Call = .60 (.60 x 100 = $60)
Total Cost = $100 per spread (1.60 - .60 = 1.00)
Days Till Expiration = 72
Trade Idea #2
Deep In The Money Call
Buy (1) Sept $7 Call = 2.35 (2.35 x 100 = $235)
Days Till Expiration = 72
Note: When trading options on Smith & Wesson investors should pay close attention to the bid/ask price of the options since at times the bid/ask prices can be $10 to $20 apart. Typically when the bid/ask prices start to get wide I would avoid buying since investors will not achieve a favorable buy/sell price.
In conclusion, options provide an alternative way of investing for a cheaper price. Smith & Wesson doesn't pay a dividend, has a beta over one and for investors looking for a risk managed strategies of acquiring what you want for less, these trades above may be for you. Smith & Wesson is a company that keeps showing investors they can grow through earnings. With 2013 expectations forecasted to be higher than the previous year, growing backlog and Americans buying more guns, I expect Smith & Wesson to head higher.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SWHC over the next 72 hours.