First hand experience from California regarding Smith & Wesson (SWHC)
Just got back from my local Turners Outdoorsman store around L.A it is 5 times the size of Dicks Sporting Goods (NYSE:DKS) and about half the size of Big 5 Sporting Goods (NASDAQ:BGFV). After hearing about the new laws the Democrats in CA. are working to pass in the State capital, I figured it was time to take advantage of the new ad Turners just released. The Smith & Wesson MP15 .223 caliber California compliant, bullet button. One of the new laws they want to pass is elimination of the bullet button and detachable magazines, with future sales being illegal. Read some of the laws that are being proposed most of which will never pass legal mustard since they infringe on the 2nd Amendment. However most likely the more conservative state Assembly will not follow suit with the very liberal state Senate only passing a few less extreme measures.
Why would I purchase this? I want to take up long range target shooting and the air rifle I currently use doesn't allow for range shooting. Pistol shooting is fun but less challenging. Who knows maybe I can make the Olympics? Not with my aging eyes.
So I got down there and of course almost no ammo, no .45,.38 303 and .223, available for purchase. Everything seems to be sold out the day it comes in according to staff even with a limit on the number of rounds a customer may purchase. The store is getting it from anywhere they can find it, but it is difficult to find.
Turners was listing the M&P15 for $899 above the $839 MSRP S&W has on their website. I was number 35 and they were serving number 28. As I waited I saw 2 S&W M&P rifles sell and another higher priced brand with a sight attached. Since they had a limited amount of pistols due to continued demand and these new laws, I assume most of the 15 or so people behind me were also planning on purchasing a rifle. When I was called I checked out the M&P15 and told Ray I would take it.
Now was my chance to fish for information of the demand for Smith & Wesson products. First I asked how many they had gotten in stock? Ray told me 250 arrived on Thursday evening. Turners has 15 stores located around Southern California. Demand can not keep them in stock so this was a larger order, they normally order in 150 lots. Turners buys guns in 150 lots according to Ray. I asked how many were left? Ray checked the computer and said they had about 80 left. It was only 10:50am on Sat. morning.
Then I asked about background checks in the last month. He said they had dropped a little from the Dec./Jan peak, but it was still above what they were doing in 2012. So no real drop off.
Then after I looked in the case I saw mostly just .22 calibers handgun some Glock pistols in different models, about 9 revolvers, a Springfield Armory pistol, a few other 9 millimeters and 1 longer barrel S&W M&P45 pistol. Almost everything was still sold out.
After completing the paperwork and paying, I reminded Ray that I wanted to buy .223 ammo. He must have forgotten to check because he began searching the store. Finally he came out of the back with 2 boxes in a bag and walked them up to the register. He told me he put them aside for someone who didn't show up at the time he told him to pick them up.
I asked Ray once again about the S&W handguns and he said that the one I saw in the case was the only pistol they had left, a display model and the others in the back room were already sold. There is a 10 day waiting period in CA to pick up firearms after purchase.
He said everything that comes in sells out immediately. Remember this now, THERE IS NO SLOW DOWN!!!
Guns continue to fly off the shelves and everything S&W makes is selling out immediately. THEY CAN'T EVEN RESTOCK THE SHELVES! Restocking every gun store in the nation will take years according to Ray, due to continued demand. This is 6 months after the shooting tragedy and 3 months after analysts predicted that sales would drop off. The NICS numbers, which are the FBI background check numbers continue to be way above last years increasing numbers. This means there are millions of gun buyers waiting in the wings to purchase a firearm that is currently available or may arrive in the future.
The demand is not slowing down for S&W for at least the next several years. The new CA. gun laws being proposed are creating further demand and according to Turners the new laws if passed will not go into effect until Jan. 1st, 2014. This means everything that comes into CA will continue to sell out.
Once the media starts to cover this news regarding new laws in CA. demand will grow even stronger. The media have been very quiet here about the new proposed laws. Seems like they are trying to sneak it by the public without citizens getting a chance to complain.
The point is that S&W continues to sell everything they make and there is no slow up in sight. Earnings will be huge and all the predictions about guns being readily available because demand is dropping is nonsense. Supply and demand push up prices as scene in my purchase over the MSRP. If demand was dropping so would prices!
Now lets look at S&W recent trading pattern and share price. Since the company produced record earnings on March 6th the share price has fallen 15% to trade at about an 8 price to earnings. All this taking place under the threat of the Senate gun control bill that had no chance of making it past the House even if it had passed in mid-April. We already know it failed and talk of bringing it back? Well that has gone out the window since a new poll released last week showed 62% of the public would like the Senate to drop the bill and move on to other issues. Not to mention all the drama taking place in Washington right now doesn't exactly boost confidence in the decisions the government has been making. It is this same distrust or fear that caused gun sales to surge after the presidents reelection that continues to push sales of firearms today. The share price currently sits at $9.11 even after the company buy back of $35 million in shares and the raising of this quarters earnings estimates. Record earnings one quarter after another, and yet even though it is half the market cap of Ruger, it's share price is 1/6th of Ruger. They currently have a PE of about 14.
S&W is grossly undervalued! Why isn't the share price higher? One reason is that since October of last year when the stock price was $9 the short interest has risen by 10 million shares even after the share buyback. Since December the short interest has risen to a consistent 14 million or over 20% short position. At the same time the dwindling daily volume has caused the days to cover to rise with my calculation as of May 31st to over 13 DTC. Studying the trading pattern the last 2 months and the failure to cover, the SP has been steadily shorted only to be covered right back to the original price after T+3 (trade plus 3 days). I point this out because the MM and short traders are searching for shares that aren't there. It really appears that nobody is willing to sell at this ridiculously low valuation. S&W should be trading at a share price of over 13 or higher following the chart channel prior to December. Remember sales have skyrocketed and continue to skyrocket since the reelection of the president. The shorts haven't started covering yet! Not for a lack of trying.
Why should shorts be worried? Well time is running out! S&W reports earnings on June 21st. The stock always rises into earnings. The rise is always quick and the lack of sellers will make it extremely volatile.
I say this speaking from experience! My previous stock predictions followed similar short interest positions and huge price movement. S&W however is in the best financial position of any company I have followed. The first was Clearwire, which I followed for a long time knowing the true value of the company was its spectrum holdings. Spectrum is a finite thing. There is only so much available and demand is rising. Since December CLWR has risen 400% and continues as Sprint and Dish Network battle for control of the assets.
The second was Boyd Gaming of which you can read some of my previous articles the last on March 13th. The demand for online gaming was my reason for investing in BYD. Within 45 days of that article Morgan Stanley upgraded the stock on all the grounds I had mentioned with the short squeeze doubling the share price of BYD from less than 7 to over 14 in about 4 weeks.
Do you see a pattern here? Demand drives up the value of a company and Smith & Wesson has huge demand!
Be prepared! Smith & Wesson will skyrocket just like their sales. Even if California which already has the strictest gun control laws in the nation adds a few more it won't change the demand, it will only increase demand in the near future as people try and beat the Jan. 1 implementation date of those laws.
Who is buying? Everyone! There are 30 million people in CA and I watched Hispanics, Blacks, senior citizens all buying today, ahead of the continued rush. From my time in the store I saw people of all ages, men and women. Americans of every ethnicity. The largest increase in gun sales is among seniors and women according to recent articles I have seen on the web. Why? Because seniors as they get older want to protect themselves. The same goes for women. The argument that gun companies will run out of buyers is ludicrous especially with some of the new laws out there. Laws that try and prevent sales of used firearms only drive sales to gun stores. Gun sales have been increasing for years and new buyers are born everyday. Gun owners may own multiple firearms and they purchase accessories for those firearms which add to sales of SWHC and RGR. People are living longer than ever before, so to say that because guns are durable goods they will run out of buyers makes no sense.
Why are they buying now? Because in America people chose the path of least resistance. When Americans are told something might be taken away or made more difficult use, they create demand. When a product becomes obsolete demand falls, but demand rises when a new improved version comes around. The demand only increases as everyone rushes to get the better product before they are left with the only choice of a less valuable harder to use product. Demand to have the best is the American way. When something may no longer be available, just the threat of losing that product will increase demand as we have seen with the latest sales surge. Continued threats the 2nd Amendment only add up to more sales. S&W is a benefactor of these threats and though the surge may slow as some analyst have suggested it won't be for several more years and it will still stay above sales seen a few years ago. Just because they slow from the massive peak doesn't mean it justifies such a low PE.
Smith and Wesson (SWHC) is extremely cheap and if, as I predict this quarter, the company will finally use some of their huge growing cash reserves to issue a dividend. Then there will be no holding it back. Don't wait, look at the chart! Look at the trading pattern! See the falling volume with the extremely high short interest. Look at the continued earnings growth, rising guidance and the firearms that continue to fly off the shelves.