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The Reason Smith And Wesson Is A Short Squeeze Candidate.

|Includes:American Outdoor Brands Corporation (AOBC)

Smith and Wesson (SWHC) earnings have exploded over the last 2 quarters with the latest earnings tripling from a year ago. The Springfield, Mass., company reported a profit of $14.6 million, or 22 cents a share, a 228% increase from the $4.4 million, or 7 cents a share, it earned in the same period a year earlier. Sales rose 38.8% to $136.2 million, from the earlier period.

"Performance gains were driven by continued robust consumer demand for firearms," Chief Executive James Debney said in a statement.

Smith & Wesson also raised its earnings guidance for its 2013 fiscal year. It forecasted total sales between $575.0 million and $580.0 million, a significant jump from the year before.

Despite the big gains, investor worries that the company's future may be hampered by tighter gun-control laws.

Yet, as we look at the share price it is currently trading at a share price of $9.09. This price is the same as it traded back in July of 2012. Now after every earnings report analysts question if the sales are sustainable? I say, yes! The company has stated that they have been able to outsource production to help with demand. Analysts ask, will demand continue? A Motley Fool article today just claimed that people won't need new guns because they can last for 100 years when properly maintained. What has this guy ever heard of population growth? Of course there will be continued demand! With Hurricane Sandy and Hurricane Katrina in their minds, people realize that you can not always count on government to protect yourself or your family. The right to bear arms is granted under the 2nd Amendment, so sales will not decline. As a matter of fact, arms sales have gained for 4 straight years and are growing exponentially.

So let me get to the main reason Smith ant Wesson will be a short squeeze candidate. First of all let us look at the shares held short back on July 9th, 2012. The closing price then was $9.10 and the short interest reported on 7/13/12 was 6,595,787 shares. Now lets look at the most recent short interest report for 3/15/13, which shows currently there are 14,601,092 Smith & Wesson shares short. That is a difference of 8+ million more shares held short. The short interest has been over 14.5 million shares since 12/31/12 reporting period following the Sandy Hook tragedy. Why hasn't the short interest fallen? Some still believe congress can somehow drive the gun makers toward BK by passing restrictive laws.

Let me tell you a few reasons why this isn't going to happen. First of all Harry Reid is trying to bring a cut up version of gun control to the senate floor next week. The bill already has seen the assault weapons ban and high capacity magazine laws removed from the bill due to a lack of support from both parties. Senator Reid is hoping to gain enough votes for a bill on universal background checks. This doesn't currently have the votes either, due to record keeping requirements which Republicans strictly oppose. They feel this could lead to a national database of gun ownership. If anything passes it will not affect gun manufactures.

Then you have to pay attention to realize that as of yesterday, Mike Lee of Utah along with Senator Rand Paul of Kentucky and Ted Cruz of Texas are sending a letter to Senate Majority Leader Harry Reid, D-Nev., that warns the trio will filibuster gun-control measures expected to be brought to the Senate floor after a two-week hiatus. So don't expect anything substantial to come out of the senate. Even if a bill makes it out of the senate, which is doubtful, you can be sure it will die in the Republican held house.

So lets look at the facts. Earnings are soaring and with most stores throughout the US sold out of nearly everything. Ammo and guns will continue to be in great demand as stores wait up to a year to be fully restocked due to extensive backorders. Ammo is very hard to obtain due to large government purchases which have caused a lack of primers for cartridges. Lets face it, this push to restrict the 2nd Amendment has shown the American public that nothing is beyond the reach of government. Years of backorders, new buyers and owners of multiple firearms will only add to the need for inventory.

Here is a quote from Joe Biden that tells you why gun sales will continue.

The prospects for other pieces of Obama's gun-control agenda, including bans on assault weapons and high-capacity ammunition magazines, are much dimmer. Biden seemed to acknowledge as much, telling activists on the call that they will get a vote but stopping short of predicting passage.

"That doesn't mean this is the end of the process," Biden said. "This is the beginning of the process. The American people are way ahead of their political leaders, and the president and I and the mayors intend to stay current with the American people." This is only the beginning of an attempt at greater gun control. The growth of the gun industry will continue as long as there are threats to the 2nd Amendment.

With all the positives this company has produced since July, blowing away earnings and operating at capacity round the clock to meet demand, the share price is the same. Even after S&W began to repurchase $35 million worth of shares in the past 6 months, which lowers the float by approximately 4 million shares or over 6 percent. Add the repurchases to the current short interest of 23+ percent and you are looking at 30 percent fewer shares available. This company is highly rated by most analysts and has seen several raise their guidance following the companies March conference call.

My last article was written about 7 days ago. In that article I pointed out the large short interest and the squeeze that was due to happen in Boyd Gaming (NYSE:BYD). Since then the price has moved from $7 to $8.69 on strong buying pressure. It sure looks like a short squeeze to me!

When the senate bill dies without a vote, I expect we will finally see some covering of the short positions and just maybe some upgrades as brokerages get past the tragedy of Sandy Hook. The share price has been held down in my opinion by market makers and hedge funds who wrote call options. The short selling the last 4 days has seen 40-30 percent of the shares traded short each day as the shorts attempt to acquire shares before the next leg up. The stock price is currently at the bottom of its trading channel up against triple 10 support at $9.09. Due to weak volume and the holidays this week it has been fairly easy for shorts to manipulate the share price down to its current price. If there ever was a good entry point of a short squeeze candidate, this is it!

Stocks: AOBC