Sturm, Ruger & Company (RGR), Smith & Wesson Holding Corporation (SWHC): Is Now the Time to Jump Back Into Gun Stocks?

Whether you like guns or not, they seem to be selling like hotcakes. An estimated 2.2 million checks were conducted by the FBI’s National Instant Criminal Background Check System last month — which makes it the fourth consecutive month of requests over 2 million.

Sturm, Ruger & Company

The two most popular publicly traded gun manufacturers are Sturm, Ruger & Company (NYSE:RGR) and Smith & Wesson Holding Corporation (NASDAQ:SWHC). After a significant run-up earlier in the year, both stocks have experienced quite a pull-back in price as well:

So, with guns seemingly continuing to be in strong demand, is now a good time to get into these gun-makers after the pull-back?

Fundamentals/valuations:

P/E Forward P/E Dividend (yield) Market Cap ($)
RGR 13.31 19.96 1.62 (3.20%) 922.89 Million
SWHC 8.86 7.91 N/A (N/A) 553.05 Million

Taking a quick look, Smith & Wesson Holding Corporation (NASDAQ:SWHC) currently appears cheaper than Sturm, Ruger & Company (NYSE:RGR), both now and going forward. Ruger does, however, offer a little more safety with its dividend. Ruger also looks like it has smoother earnings than its smaller competitor:

Both companies appear to be on the “up-and-up” as far as earnings go, however, it’s contingent upon people buying guns. So what do their balance sheets look like?

While Smith & Wesson Holding Corporation (NASDAQ:SWHC) is surely in great financial shape, Sturm, Ruger & Company (NYSE:RGR) is even stronger financially, carrying no debt.

Negative headwinds– simply bad, or disastrous?

Many perceived negative headwinds have surfaced for gun stocks, as there has been some public and governmental calls for action after recent shootings. Stricter gun laws seem to be a perceived negative for gun stocks, but guns still seem to be moving off the shelf.

The gun control vote now seems to be centered on extended background checks, which wouldn’t necessarily devastate gun-makers. The current deal would fail to ban assault weapons. Banning assault weapons would cripple sales more than any background check ever could, so without this ban, the negativity may begin to slowly swing into the positive area with regards to gun stocks.

A bigger concern for gun stocks, at least in the short-term, may be due to short sellers. An abnormally large number of people seem to expect the price of these gun stocks to tank, and as of late, they have been getting their wish. Of course, things may also swing into the opposite direction — with a short-squeeze propelling a future gun stock rally.

Either way, almost 27% of Sturm, Ruger & Company (NYSE:RGR)’s float is being shorted — with Smith & Wesson Holding Corporation (NASDAQ:SWHC) seeing around 21% of its float being shorted, according to Yahoo! Finance. Investing in gun stocks could be playing with fire, but so could shorting them. It all comes down to gun sales and earnings.

Let’s take a look at the alternatives…

Gun manufacturers are not the only outlets to get exposure to increasing gun sales. Guns need bullets. It’s becoming increasingly difficult to find ammunition nowadays, and demand is soaring. An article on Forbes has even called ammo the next bubble, equating it to gold in the 70s.