Your Easiest Profit Target in an Election Year

by Sean Brodrick
Close up of a shooting target and bullseye with bullet holes

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...

050316IU_sp500

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.

Good investing,

Sean

Have thoughts on this article? Leave a comment below.

P.S. For five long years, the commodities market was a dormant volcano. But now that ol' volcano is starting to smoke, and select stocks are poised to explode higher. I can't think of a better opportunity to pluck diamonds from the dustbin. That's why I'll be joining fellow industry experts at the Sprott Natural Resource Symposium in Vancouver July 26-29.

Together, we'll explore the greatest opportunities the sector has to offer. Vancouver is one of my favorite cities... and with gold and silver on the launch pad, the timing can't be beat! Join me, won't you? You'll find all the information you need right here.

A Solid Opportunity (Whether You Like It or Not)

As Sean mentioned, a lot of folks don’t like guns. That should come as no surprise to anyone who’s been watching the various campaign ads touting candidates’ negative NRA ratings. (Hillary scores an “F” by the way.) But even though something is controversial, it can still present a solid investment opportunity.

Allow me to present Exhibit B: cigarettes.

Whether you like ‘em or not, Americans can’t seem to stop lighting up. That’s why Sean recently recommended Reynolds American (NYSE: RAI) to his Oxford Resource Explorer subscribers. The company owns Newport, Camel and Pall Mall (among other brands). Here's what Sean had to say in his initial recommendation:

“The modern-day version of the company was formed in 2004 by the merger of two other tobacco companies: R.J. Reynolds Tobacco Holdings and Brown & Williamson Tobacco. Now Reynolds American has a market cap of $68.9 billion and more than 6 million customers in the U.S...

“Reynolds American pays a solid dividend of just over 3% to investors. That dividend is expected to rise 5.88% per year for the next three years. And the company has a track record of dividend raises. In fact, Reynolds American's dividend has grown 24% in the last three years. It's up 200% since the company was formed in 2004...

“Trading at just over 1.3 times earnings growth, with rising sales, fat margins, and the potential for another smart acquisition or spinoff, this stock has the potential for 45% price appreciation over the next year.”

- Alexander Moschina with Sean Brodrick

Live Twitter Feed