Your Easiest Profit Target in an Election Year
A Note From the Managing Editor: We’ll return to Alexander Green’s series on the American Dream tomorrow. (In case you missed Parts 1 and 2, you can catch up here and here.) In today’s issue, we’re going to check in on a major - and somewhat controversial - opportunity that Sean covered earlier this year.
Fortunately, as Sean writes below, there’s still time to get in and snag some gains. But you may want to act sooner than later...
Boy, I sure hope you listened when I told you gun stocks can really outperform in an election year.
As I explained in my story that ran here on January 22, “The NRA and its friends tell people that Democrats are going to take their guns away. People run out and buy more guns.”
It’s that simple.
Adding fuel to the fire, Hillary Clinton has promised even tougher rules on guns if she’s elected. Granted, Hillary could never get such legislation through Congress. But that doesn’t matter. Once again, in my words from January, “Just the idea of further gun restrictions should whip up a frenzy of rhetoric... and sales.”
That’s certainly been the case so far, as reflected in the earnings of Smith & Wesson Holding Corp. (Nasdaq: SWHC) and Sturm, Ruger & Co. (NYSE: RGR).
Ruger just reported first quarter earnings on Monday. Sales for the company jumped 26% year over year.
And when Smith & Wesson reported earnings on March 4, it announced a 61% increase in sales for the fiscal third quarter. According to the company, firearms sales surged 56% year over year. It even raised its guidance.
So, yep... gun sales are surging.
Unfortunately, there is one gray cloud that’s causing a pullback in the sector. But as I’ll explain, this is actually presenting a perfect buying opportunity...
More Volatility... And More Upward Potential
Data from the National Instant Criminal Background Check System showed that handgun background checks were down 16.7% in March. And rifle sales were down 3.4%.
This information sent Smith & Wesson and Ruger plunging.
Let’s take a look...
Fortunately, newly released data from the FBI is giving us a brighter picture. When the first quarter is viewed as a whole, firearm background checks actually shifted into overdrive.
The number of checks conducted in the U.S. rose 36% compared to the number a year earlier. Those related to handgun sales - as opposed to rifles and shotguns - are leading the way higher.
This news helped generate that upswing you see on the far right of the chart.
Year to date, despite some big swings up and down, Ruger has more than doubled the performance of the S&P 500.
Smith & Wesson, on the other hand, has barely beaten the index... for now. But thanks to its bigger correction, the opportunity may be even greater here.
Obviously, background checks could generate more volatility. As the election nears, however, we’ll see only more gun rhetoric. That should spark even more sales - and more upward moves.
Lots of Reasons to Like Smith & Wesson and Ruger
Even with the recent drops, both Smith & Wesson and Ruger are up since my initial recommendation. And I think there are still lots of reasons to like these stocks.
- Ruger pays a nice 2.5% dividend yield. It also buys back its own stock. And it is debt-free.
- Smith & Wesson generates tons of free cash flow. It recently traded at just 9.6 times free cash flow. And it is 24% off the 52-week high it hit in March.
I think any pullback is a buying opportunity in either stock.
Just one final note...
In my original story, I received some heartfelt comments from readers who were anti-guns or anti-NRA. I understand your position. But I believe it’s my duty to bring my readers the best opportunities I can.
And in an election year, guns have a history of generating huge profits.
Have thoughts on this article? Leave a comment below.
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