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Fundamental Investing: Gun industry loaded to soar

Posted January 31, 2008

 

A Today's Financial News Research Report:
"A rebounding economy, a Supreme Court decision, and the market’s tendency to fix its mistakes, makes this a great opportunity to lock in some profits in a year that will undoubtedly be synonymous with recession." — Andrew Snyder

By Andrew Snyder, TodaysFinancialNews.com

 

Today's Financial News feed provides an independent and practical perspective on the U.S. and global investment markets.
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Baltimore (TFN): The following is the TFN Hot Stock Pick of the Week Research Report. An abbreviated version is available by video. Click here to watch.

You have to take advantage of the opportunities surrounding you, whether it is fair or not. The notion is true in our everyday lives as well as in the financial markets. 

In today’s world filled with media hype, hyperbolic headlines, and every other type of extreme imaginable, it is no wonder so many people are prone to overreact. 

I cannot help but think of a good family friend. In close circles, she’s known as the “drama queen.” Tell her you have an ache and she will treat you like your next breath could be your last. Mention how warm the weather is and she will go on and on about how bad global warming has become. And never, ever, even think about telling her she has gained a pound or two. It is a surefire route towards dramatic disaster.

We all know somebody like this. They are the folks glued to CNN each time Nancy Grace prompts a news flash, and the people hiding under their bed whenever a loud noise surprises them. 

Sometimes their overreactions can be a nuisance, but when used properly, they can be a great advantage. It is no different with the financial markets, where an overreaction can make you rich. 

No time to read? Watch the financial video…

Take advantage of their mistake

Lately, the equities markets have been making huge swings. A few years ago, I likened a similar event to Oprah jumping on a trampoline – massive moves up and down. The description has never been more apt. 

Many stocks are taking a beating because of news that would have barely attracted a headline just six months ago. Smith & Wesson (SWHC:NASDAQ) is one of those companies. 

The gun manufacturer’s share price is down more than 75% from its 52-week high of $22.80 reached in August. The shakedown has been one of the market’s greatest overreactions.

SWHC Chart

 

The latest overly dramatic moment came on January 22 when the company announced it will temporarily sideline its practice of giving financial guidance until business conditions become less “unsettled.” Shares plunged by more than 20% on the news. 

It was exactly this kind of reaction from the Street that caused company officials to halt the guidance practice. Each time Smith & Wesson discussed its outlook, its share price was slashed, whether it was warranted or not. The drama queens were controlling the company’s destiny. Not any more. Executives are rightly remaining tight-lipped until conditions rebound.

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It’s a smart move that has the potential to put big profits in your pockets. As I write, shares of the gun maker are trading for $4.17. Many analysts boast twelve-month forecasts that put share price back above $20 thanks to a strengthening market. If you purchase at today’s price, reaching that price would hand you gains of close to 400% in a year that is looking to be one of the roughest in a long time. 

A big, profitable mistake

Granted, Smith & Wesson’s business has slowed. That slowdown is what kicked off this bearish plunge. But the market’s overreaction was way out of line. Each time the company revised its forecast, share price plunged lower and lower, no matter the news. 

It has been one drop after the next, even though Smith & Wesson continues to sell and expand its products. Not only is the military pending contracts that could total $600 million (last year’s total revenues were just $283 million), but also an upcoming Supreme Court decision could jumpstart gun buyers. The entire industry will soar.   

In just a few months, the nation’s top court will decide the fate of the Second Amendment. A favorable, pro-gun decision would be a great boost for the nation’s gun manufacturers. As one of the largest suppliers of handguns, Smith & Wesson would relish the news.

The decision will likely come in June of this year. In the months leading up to that date, I expect the firm to make a steady rise back towards the $20 mark. It will not take long for the profits to start pilling up. At $4 and some change, shares of Smith and Wesson are dirt-cheap. 

When everybody else is talking about the dreaded “R” word, you have to take advantage of the opportunities laid in front of you. The equities market is a dramatic beast, prone to huge overreactions. Take advantage of them and you could walk away much, much richer.

My recommendation is to buy shares of Smith & Wesson (SWHC:NASDAQ) at or below $6.00 and hold them for at least one year. A rebounding economy, a Supreme Court decision, and the market’s tendency to fix its mistakes, makes this a great opportunity to lock in some profits in a year that will undoubtedly be synonymous with recession.

 

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