Smith & Wesson: Zacks’ Bear of the Day Play

Gun control. Conceal and carry. Some of the most hotly debated political issues out there right now. I’m not in the business of politics. I’m in the business of making money in the stock market. And when I find a company that’s misfiring I try to tell investors to steer clear of it. Not for any underlying political stance I have on an issue. Trust me, I could care less. But in the case of today’s Bear of the Day, you may want to put on some Skynyrd and get back your bullets.

Smith & Wesson (SWHC – Snapshot Report) is a Zacks Rank #5 (Strong Sell) that has been stinking up the place recently. It’s not just the chart that leaves something to be desired, but the earnings revisions to the downside that are really burying this one. Frustrating for investors who enjoyed a big rally in the first half of the year.

Smith & Wesson has a vision of being the leading firearms manufacturer in the world. The name carries a lot of weight as the company has been around since 1852. Headquartered in Springfield, MA, SWHC has 1,700 employees. They are a huge player in the consumer and professional firearms markets.

But the last quarterly report is what has put this gun maker back into the holster. Year over year sales were down 22.9%. Long gun sales were responsible for 87% of the sales decline. Handgun sales fared much better, losing only 3.2% year over year. It’s not just the sales numbers but also the margins that suffered. Gross margin fell from 42.6% to 37.2%.

One bit of good news for SWHC was the jump in new shooters. Nearly 11% of people that have been sport shooting in 2012 were beginners. And a handgun usually isn’t the kind of thing you only buy one of. Nearly 90% of handgun owners own multiple firearms with an average of 8 handguns per owner. Nearly 25% of first-time buyers buy at least one more firearm with the first year after their first purchase.

Yet analysts remain unimpressed. Four analysts have dropped their earnings estimates for the current quarter, next quarter and the current year. This has dropped consensus for the current quarter from 28 cents all the way down to 7. The current year numbers look even worse, with consensus going from $1.42 per share to 91 cents.

Investors have been heading for the sidelines ever since the end of June. After experiencing a great run from the beginning of the year until then, the stock began to slide and has seen little in the way of support on the way down. Since dropping below its 25 day moving average shifted by 5 days in late June, the stock has barely poked its head above it. The last dramatic selling saw SWHC lose its hold on $13 and in the last week has dropped all the way down to $10.46 today. If you’re looking for an alternative in the same space you’re out of luck. Right now even Sturm Ruger (RGR – Snapshot Report) is a Zacks Rank #4 (Sell)

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