Bearish stock bets against Smith & Wesson Holding Corp. (SWHC:US) have fallen to the lowest since before the school massacre in Newtown, Connecticut, as fading prospects for new U.S. gun-control laws ease concern that profits may tumble.
Short sales in Smith & Wesson slid 10 percentage points from a January high to 13 percent of shares available for trading, based on data compiled by Bloomberg and London-based Markit Group Ltd. The gauge for Sturm Ruger & Co. (RGR:US), the largest U.S. gunmaker by market value, fell 15 points from a post-shooting high in January to 17 percent and touched a one-year low in April.
The Obama administration’s gun-control push after the Dec. 14 slayings of 26 people at Sandy Hook Elementary School stoked firearm demand while spurring speculation that sales eventually would be damped. Then the Senate rejected gun-buyer background checks in April, and a May 23 Pew Research Center poll found that most Americans see new laws as unlikely.
“Shorters may have thought that if they were to tighten gun-control legislation, that would significantly impact earnings results,” said Rommel Dionisio, a Wedbush Securities Inc. analyst in New York who rates Smith & Wesson as neutral. “The fact that these proposed legislation bills have failed to pass through Congress resulted in some short covering.”
Short sellers borrow stocks and sell them in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder. Short covering occurs when an investor buys a security to close a short position.
Smith & Wesson and Sturm Ruger sell handguns and rifles, including military-style assault weapons similar to the Bushmaster AR-15 used in Newtown. Their status as publicly traded companies made them targets for gun-control advocates, and some public pension funds dumped the stocks.
While bearish sentiment is waning, neither Sturm Ruger nor Smith & Wesson has made up all the lost ground after prices fell to December lows. Sturm Ruger was down 4.1 percent (RGR:US) to $45.75 through yesterday from the day before the shootings, while Smith & Wesson had declined 4.7 percent to $9.09.
E-mails and phone calls to Ken Jorgensen, a spokesman for Southport, Connecticut-based Sturm Ruger, weren’t returned. Elizabeth Sharp, investor relations vice president at Springfield, Massachusetts-based Smith & Wesson, said yesterday by e-mail that the company doesn’t discuss short-interest holdings.
“Consumers have been rushing to buy tactical rifles and high-capacity pistols, fearing that they’d be regulated or banned,” Dionisio said in a June 7 phone interview. “Smith & Wesson has been more of a beneficiary of these consumer trends than Sturm Ruger has.”
Smith & Wesson’s adjusted earnings for the fiscal year ended April 30 probably will be $1.19 a share, according to the mean of seven estimates compiled by Bloomberg. That would be the highest since at least 2000, the data show.
Short sales in Smith & Wesson were at the lowest yesterday since Dec. 11, the Bloomberg and Markit Group data show. Short sales as a percentage of shares outstanding in Smith & Wesson peaked at 23 at the end of January.
Sturm Ruger’s post-shooting high was 32 percent on Jan. 3. Each company’s reading retreated Feb. 13, after the Senate Judiciary Committee agreed to hold a hearing on an assault-weapons ban and investors speculated that firearm demand and manufacturers’ earnings would surge. Weeks later, Sturm Ruger posted a 2012 profit that was the highest since at least 1987.
Some investors, such as Chief Investment Officer Randy Bateman at Huntington Asset Advisors Inc., are concerned higher demand will soon wane, damping gunmakers’ sales and profits.
“The theory is that this was a one-trick pony,” said Bateman, whose Columbus, Ohio-based firm oversees $15 billion, including shares in both gunmakers. “They’re in an environment that’s not going to last. There’s going to be some slowdown.”
Rather than sell his shares, he has written call options on Sturm Ruger, a strategy investors use to protect against a decline in the stock.
The companies have missed a rally of 18 percent in the Russell 2000 Index of small companies since Dec. 13. Smith & Wesson traded yesterday at 8.5 times projected earnings for its current fiscal year, while Sturm Ruger’s ratio was 13, according to data compiled by Bloomberg.
While analysts expect Smith & Wesson profits to retreat after the projected 2013 record, they forecast (SWHC:US) adjusted earnings of $1.08 a share in fiscal 2014. That result would still top every year other than 2013 since at least 2000.
Analysts estimate Sturm Ruger will report profit (RGR:US) of $3.95 a share in the year ending Dec. 31, higher than any period going back to at least 2004.
“It’s a horrible scenario that a bad incident could cause that much demand to be placed on the manufacturers,” Bateman said in a June 6 phone interview. “On the bullish case, when we do see those earnings come out, the stocks could get another boost.”
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