Gun Background Checks Plunge. Time to Sell Smith & Wesson?

By Markets Fool.com

Don't look now, but Smith & Wesson stock is starting to look cheap.

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Gun sales data has some folks scared -- but is this a golden opportunity to buy Smith & Wesson stock? Image source: Getty Images.

The trouble with statistics

With Smith & Wesson stock up 37% over the past 52 weeks, that might sound like a surprising assertion to make. And yes, from one perspective, I suppose an investor could argue that Smith & Wesson stock is "37% more expensive" than it once was. But here's the thing: Since hitting an all-time high price of $29.37 back in mid-March, Smith & Wesson stock has slumped 27% and is fast approaching its lowest levels of the year.

What's even more interesting than this math, though, is the reason for Smith & Wesson's sell-off.

More trouble with statistics

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The reason Smith & Wesson stock is down, you see, is that the past couple of months have seen pretty steep declines in the sequential rate at which gun buyers apply for government background checks required to purchase a gun. Back in April, Smith & Wesson stock was hit by a trio of analyst downgrades citing a supposed 13% decline in gun-buying background checks via the FBI National Instant Criminal Background Check System (NICS) in March. That falloff in gun-buying applications spooked investors into dumping Smith & Wesson stock (yes, and Sturm, Ruger as well).

If NICS checks are dropping again today, therefore, it stands to reason that the stock might collapse again. (And in fact, some analysts are beginning to worry publicly about the company's future.)

But here's the thing: If you look closely at the NICS data, what it actually shows is that background checks in March declined not 13%, but 3.5% -- from 2.6 million checks in February, to 2.5 million in March. The really big drops in sequential NICS checks didn't arrive until April (down 15% from March) and May (down 13%).

These statistics really aren't troubling at all

What's more, while sales are clearly dropping sequentially as the year progresses, this is hardly unusual. Historical NICS data going back as far as 1998 shows that background checks always decline steadily from about February or March through June or July of any calendar year -- without exception -- before beginning to pick up again in mid-summer. The more important data to focus on, therefore, is the trend in NICS checks year over year, comparing February 2016 to February 2015 for example, or March 2016 to March 2015, or April, or May.

And what do we see there?


Data source: Federal Bureau of Investigation.

Year over year, NICS checks jumped 40% in February, 25% in both March and April, and 18% in May. If you want to quibble over the numbers, well, I suppose you could say that the year-over-year growth rates are slowing somewhat -- but even at the low end, I know companies that would jump at the chance to get the "bad" news about an 18% jump in industrywide sales.

What it means for investors

Viewed from one perspective -- sequentially -- gun sales may be slowing. The bigger-picture view, however, shows that the market for firearms this year is still going great. What's more, I'd argue that in an election year when gun regulation will likely play a part in both parties' platforms, the chances of gun sales continuing to grow look pretty good.

Analysts agree.

According to data from S&P Global Market Intelligence, the consensus on Wall Street is that Smith & Wesson's profits will rise about 12.5% annually on average over the next five years. That's a rate more than twice as high as analysts foresee for S&W rival Sturm, Ruger, by the way. Meanwhile, at a share price of just 14.8 times earnings, Smith & Wesson stock still costs less than Sturm, Ruger's 15.9 P/E ratio.

If you ask me, that's an argument in favor of buying Smith & Wesson stock, not selling it.

The article Gun Background Checks Plunge. Time to Sell Smith & Wesson? originally appeared on Fool.com.

Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 292 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.