Bookkeeping: Starting Smith & Wesson (SWHC) Position

The two major public gun makers have seen a resurgence as daytraders piled in the past few months. Unlike most "thesis" trades I am worried this one has some footing to it. If you have been watching the news the past month there has been a monster string of mass killings - almost all have been job/economic related. I hope I am wrong on this one, but I do believe this summer when the weather heats up and the "real economy" (non inflated world of stock prices) degrades, a country with countless unemployed men in the 18-35 demographic with little prospects of finding gainful employment could potentially make a very serious turn for the worse. While the past 20 years Wall Street mostly ignores Main Street, there could be some very eye opening things happening as "government" unemployment rates rise to the low double digits ... meaning real unemployment is at least 1 in 5 people.

See this quick two minute story - what is most alarming ... well ALL of it is alarming, but in this gun culture without adequate safety nets it is quite scary to see the damage inflicted on the police force - both Oakland and Pittsburgh forces suffered multiple losses.


Watch CBS Videos Online

The two major public gun makers are Smith & Wesson (SWHC) and and Sturm, Ruger, & Co (RGR). The latter has the better balance sheet but in this world where fundamentals no longer matter - buy the more speculative fare and chuckle to self. So I'm going with SWHC, starting with a 1.3% stake on the pullback to the 20 day moving average $5.50. I am hoping for a more serious pullback as these stocks have had enormous runs - but then again, what hasn't.

Here are Smith & Wesson's latest earnings from early March...

• The parent of gun maker Smith & Wesson reported Thursday that it climbed to a profit in its fiscal third quarter from a year-ago loss, as sales of handguns and tactical rifles soared. Smith & Wesson Holding Corp. said that for the three months ended Jan. 31 it earned $2.4 million, or 5 cents a share, compared with a loss of $1.8 million, or 4 cents a share, a year earlier.
• Net product and services revenue in the quarter rose nearly 26 percent to $83.2 million from $66.1 million, as pistol sales jumped 46 percent on strong consumer demand and law enforcement purchases of M&P pistols. Handguns and tactical rifle sales offset a decline in hunting products sales linked to fewer consumer discretionary purchases amid the recession.
• The results easily beat estimates of analysts surveyed by Thomson Reuters, who expected profit of 2 cents per share on sales of $74.1 million.
• The company ended the quarter with roughly $21.3 million of cash without accessing its revolving line of credit. The company said it amended its revolving line of credit with TD Bank, giving Smith & Wesson incremental borrowing capacity at a future date should the company elect to access it. (normally I'd worry but debt seems to not be an issue in the new bull market) The company also said it amended its revolving line of credit that expanded the leverage ratio covenant to 3.5 from 3.0 for April 30 through fiscal 2010, and to 3.25 from 3.0 for fiscal 2011.
• Sales of handguns and tactical rifles for the third quarter grew 62 percent over the prior year period. M&P tactical rifle sales rose 111 percent. The company reported a 46 percent drop in sales at its hunting firearms segment.

Now keep in mind some of this growth was in response to fears of Obama regulations on guns; and even this company is not recession proof as hunting is dicretionary. Protecing your family? Not so much...

My thesis has for well over a year been that social unrest shall be increasing dramatically the longer we go. It takes a lot to get Americans incited - unlike countries overseas. While unemployment can be dismissed lightly by the market, it won't be for a populace where 1/4th of the unemployed now have been out of work at least 6 months, the highest rate since the early 80s. And it gets worse from here.

Long Smith & Wesson in fund; no personal position