Market Overview

Gun Stocks Plunging Again

Leading gun manufacturers Smith & Wesson (NASDAQ: SWHC) and Sturm, Ruger (NYSE: RGR) have been undergoing a severe correction over the last few months, and both stocks have fallen sharply again on Tuesday. The near-term catalyst for the decline in the two names was Smith & Wesson's earnings report on December 6.

Over the last three months, SWHC has lost 28 percent and RGR is down almost 19 percent. On the one month chart, SWHC is down 16 percent while RGR has registered a decline of more than 13 percent. On Tuesday, Smith & Wesson was trading down over 8 percent and Sturm, Ruger had lost five percent after the first hour of trade.

Volume in both stocks is running very high, which could signal a near-term capitulation bottom in the stocks. More than 1.2 million RGR shares have already traded hands on the day versus a full-day, three-month average of roughly 542,000. Similarly, more than eight million SWHC shares have already traded compared to a three-month daily average of just over three million.

While both stocks had already been headed down prior to last week's tragic school shooting in Newtown, Connecticut the incident appears to have accelerated the declines. While senseless tragedies such as what transpired in Newtown may trigger a rise in already brisk gun sales, investors are likely worried about the proposition of increased gun control in the wake of the most recent spree killing.

More stringent gun control is the number one risk that faces these companies right now. Gun manufacturers have done extremely well amid rising sales in recent years and absent any type of restrictive legislation there is little indication that the trend will not continue. Revenue at Sturm, Ruger has gone from roughly $181 million in fiscal 2008 to $329 million in 2011. Smith & Wesson has also seen a healthy, if not as dramatic, increase in its revenue over the same time period.

Over the last year, RGR is up around 27 percent and SWHC has climbed more than 100 percent. On the five-month chart, RGR has soared roughly 400 percent while SWHC has only added 25 percent, largely because the stock was hit extraordinarily hard by the financial crisis.

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