Gun Sales are Booming: Time to Buy Gun and Firearm Stocks? Sturm, Ruger & Company (RGR) & Smith & Wesson (SWHC)

Despite having President Obama in the White House and then the recent Trayvon Martin shooting in Florida, gun and firearm sales are booming – meaning it might be time to take a good look at gun stocks like Sturm, Ruger & Company (NYSE: RGR) and Smith & Wesson (NASDAQ: SWHC). To start with, gun and ammunition sales are soaring with gun makers unable to keep up with demand and apparently its due to fears that President Obama will be reelected and then go after all of those “bitter clingers” who own firearms (sales also soared around the time he was first elected and have apparently remained strong throughout his administration). Moreover, the recent Trayvon Martin shooting may have people fearful of new gun laws as there have been calls for stricter gun control laws in its wake. However and in reality, the Trayvon Martin case has probably generated significantly more calls and momentum to at least review “stand your ground” laws rather than create more gun control laws while its unlikely President Obama, IF he’s reelected, will be able to get tougher gun control laws through Congress. Nevertheless, he can use the bureaucracy to make life more difficult for any law-abiding citizens who want to exercise their second amendment rights. So should investors go out and buy firearm and gun stocks like Ruger & Company (RGR) and Smith & Wesson (SWHC)?

Starting with Sturm, Ruger & Company (NYSE: RGR), its involved in the design, manufacture and sale of firearms and castings to domestic US customers. On Thursday, Sturm, Ruger & Company fell 1.41% to $50.97 (RGR has a 52 week trading range of $18.65 to $53.29 a share) for a market cap of $974.44 million plus the stock is up 52% since the start of the year, up 126.4% over the past year and up 274% over the past five years. However and back in late March, Sturm, Ruger & Company announced that it had received more than 1 million orders in the first quarter – so many orders that the company has been forced to suspend accepting any new orders until the end of May. Otherwise, Sturm, Ruger & Company reported that revenues rose from $255.2 million for 2010 to $328.8 million for 2011 while earnings increased 42%. Sturm, Ruger & Company also has a P/E of 24.39, which some investors might view as being a bit high for a non-tech stock but it also has a forward annual dividend of $0.85 for a forward dividend yield of 1.70%. Hence, investors should be asking whether Sturm, Ruger & Company’s stock price can continue the upward trajectory until after the elections or whether or not its already overvalued.

Finally, Smith & Wesson (NASDAQ: SWHC) is a firearms manufacturer and a global provider of other products and services for safety, security, protection and sport. On Thursday, Smith & Wesson fell 0.84% to $8.29 (SWHC has a 52 week trading range of $2.29 to $8.60 a share) for a market cap of $537.89 million plus the stock is up 90% since the start of the year, up 136% over the past year and down 41% over the past five years. Smith & Wesson has decided to focus on firearms after getting rid of its perimeter security business and this has paid off for the company. In fact, fiscal 3Q2012 sales rose 23.8% to $98.1 million while net income came in at $5.4 million verses a net loss of $2.7 million for the same period the year before. Moreover and as of January 31, 2012, Smith & Wesson reported a firearm backlog of $198.5 million – up $124.7 million or 168.9% verses the end of the same period last year and an increase of $48.6 million or 32.0% from the most recent sequential quarter.

However and a word of caution: According to Google Finance, Smith & Wesson has a P/E of 55.99 and according to Yahoo! Finance, the stock has a P/E of 125.61. Without trying to figure out why these two different websites are giving two dramatically different figures, what’s worth noting is that both are fairly high and would indicate the stock might already be overvalued. On the other hand, Yahoo! Finance also gives a much more favorable forward P/E of 18.42 for the April 30, 2013 fiscal year end. Smith & Wesson pays no dividend.

The Bottom Line. My guess is that with President Obama in the White House, gun stocks Sturm, Ruger & Company (RGR) and Smith & Wesson (SWHC) will continue to shoot higher BUT investors who don’t already own them should be keeping an eye on P/E ratios and valuations as these stocks could easily become or already be overvalued.