Back in October, soon after the tragic Las Vegas shooting, I examined the stocks of the big three U.S. gun makers to see if the resulting surge in gun buying (out of fear that gun controls would be increased) had affected the stocks. And I found that it had not! In fact, I found that all three gun stocks were in downtrends. So I didn’t recommend any of them.
And what have they done since?
All three have sunk even lower, down 34.1%, down 26.0% and down 1.6%, for an average loss of 20.6%.
And now I’m taking another look, partly because the recent marches to end gun violence suggest that pressure to enact gun control legislation is increasing.
Gun Stock #1: American Outdoor Brands (AOBC)
Previously known as Smith & Wesson, this company was founded way back in 1852. It’s headquartered in Springfield, Massachusetts, home of the original Springfield rifle.
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But the company changed its name to American Outdoor Brands in January 2017, and now, in addition to Smith and Wesson firearms and ammunition, the company also has divisions that make and sell hunting and shooting accessories, prisoner restraints, laser sights, knives and survival equipment.
Smith & Wesson Model 69 Combat Magnum – $849
The company’s brands include M&P, Thompson/Center Arms, Crimson Trace, Caldwell Shooting Supplies, Gemtech Silencers, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal Reloading Tools, Lockdown Vault Accessories, Hooyman Premium Tree Saws, BOG POD, Golden Rod Moisture Control, Schrade, Old Timer, Uncle Henry, UST, Imperial and Bubba Blade.
Handguns and long guns account for roughly 80% of revenues.
Fiscal 2017 was the company’s best year ever, with revenues swollen by two acquisitions as well as gun-buying by Americans fearful that the election of Hillary Clinton would lead to stricter gun laws.
It didn’t happen.
And 2018 has been a disaster by comparison.
In the quarter ended January 31, revenues were $157 million down 32.6% from the year before. At the same time, earnings were just nine cents per share, down 86% from the year before. (Those are seriously troubling numbers.)
CEO James Debney blamed “challenging market conditions,” yet projected that “the next 12-18 months could deliver flattish revenues in Firearms,” which seems entirely too optimistic.
Apparently thinking the same way, analysts have been lowering their projections for the company. The consensus now is that earnings will shrink to $0.32 in fiscal 2018, a decline of 88%, and then rebound to $0.62 in 2019.
As for the stock’s chart, it peaked at 31 in August 2016, and has been working its way lower since, losing more than 67% of its value since the top.
It’s a clear downtrend.
Gun Stock #2: Sturm Ruger (RGR)
Founded in 1949 and located in Southport, Connecticut, Ruger makes and sells pistols, revolvers, rifles and shotguns, primarily for the commercial sporting market, though some product goes go to law enforcement. Accessories account for just 3% of revenues.
Ruger Model 8661—9MM Luger – $579
In the fourth quarter of 2017, revenues were $118 million, down 27% from the year before, while earnings were $0.56 per share, down 49% from the year before.
The problem, according to management, was not only the collapse of the strong sales in the previous year (just as at AOBC), but also the “unfavorable de-leveraging of fixed manufacturing costs due to the decline in production volumes.”
As with AOBC, analysts have been reducing their estimates. Currently, the consensus is for earnings to shrink 38% this year to $3.98 per share.
As for the stock’s chart, it peaked at 86 back at the start of 2014, at 78 in March 2016, and at 69 in mid-June of 2017—and in early March it was down to 43.
This is clearly a downtrend, but nowhere near as steep as AOBC’s. Some potential positive factors: RGR has no debt and it pays a dividend of 2.3%—but that’s small comfort when your stock is falling.
Gun Stock #3: Vista Outdoor (VSTO)
Headquartered in Farmington, Utah (in part because the state offered tax credits), Vista is a young company, founded in 2015, though it can trace its roots back through Alliant Techsystems (a defense contractor) to Honeywell, which traces its parentage to 1888.
Unlike the first two companies, Vista is more diversified; it’s primarily an outdoor products company. While its firearms brands include Federal Premium, Savage Arms, CCI, Speer and Stevens (which account for slightly more than 50% of revenues), its non-firearms brands include Bushnell, Camelbak, Camp Chef, Primos, Bollé, Bell, Giro, Serengeti, Jimmy Styks, Cébé, RCBS, Hoppé’s, Uncle Mike’s, Gold Tip, Weaver, Blackburn, KRASH!, Copilot, Raskullz and Tasco.
Savage MSR 15 Patrol – $868
Among the non-firearms products made are binoculars, trail cameras, archery accessories, protective eyewear, fashion and sports eyewear, helmets, hydration systems and stand up paddleboards.
Vista Outdoor has been growing steadily through acquisition. Fiscal 2017, ended March 31, saw revenues grow 12% to $2.54 billion, while earnings fell 24% to $1.90 per share.
But then came the same troubles experienced by the first two companies. In the quarter ended December 31, revenues were down 11% from the prior year to $581 million while earnings were down 79% to $0.13 per share.
As for the stock, Vista started trading in March 2015 (after being spun off from Alliant), and peaked at 54 in March 2016. But then sellers took charge for a year and a half, pushing the stock way down to below 13 last November.
That was followed by a rebound to 20 in February, and the stock is now back below 17, so it’s been a mover. But I can’t yet say the trend is up.
What I can say, however, is that of these three companies, Vista is clearly the youngest and most forward-looking and therefore most likely to make the changes needed to succeed in the future—whatever they are.
AOBC, by contrast, seems to have the oldest mindset and therefore the most reluctance to change—and that could continue to hinder it.
In any case, none of these three gun stocks fit any of the proven Cabot investing strategies (value or growth) and none of them have been recommended by Cabot analysts—and it’s not wise to go outside of our successful systems just because news events pique your interest.
Instead, your odds of success are much better if you follow proven investment systems, and invest in stocks that aren’t obvious to everyone.
Which brings me to Axon Enterprises (AAXN), better known by its former name, Taser.
Axon Enterprises (AAXN): Better than Gun Stocks
Now that’s a strong chart! And here’s the story behind it, as published recently in Cabot Top Ten Trader.
“Axon Enterprises used to be known as Taser International, which was a star back in the early 2000s as its next-generation stun guns gained in popularity. That business is still solid today; Taser weapons are used by more than 18,000 law enforcement agencies in more than 100 countries. But the story is now about much more than Taser weapons—Axon is making hay with its body cameras, in-car video systems and its Evidence.com cloud software system that helps cops store, manage and share data and video, and manage records. These new products also mark a big business shift toward a recurring revenue model (sell the hardware, then get long-term subscriptions to its cloud platform), and investors think the business could be near a tipping point. In Q4, Taser weapons still accounted for two-thirds of revenue, but growth in that area (10%) was nothing compared to the rest of its business (up 27%), and Axon said its annual recurring service revenue was up 74% in the quarter, while future contracted revenue grew 8.5% from the prior quarter to $536 million. In 2018, the top brass sees mid-teens total revenue growth, but with expanding margins and corporate tax cuts, earnings are expected to lift 52%. Interestingly…the CEO just switched to a 100% performance compensation package that is aligned with company performance and stock returns, which is a good sign.”
Note: Over the years, we’ve often enjoyed sampling the products and services of stocks we’ve recommended, from Apple (AAPL) and Amazon (AMZN) and Netflix (NFLX) to Buffalo Wild Wings and Grubhub (GRUB). But the Taser system is one we’ve never sampled and I’m in no hurry to try.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More