So-called vice stocks have been booming over the past year, but shares of gunmaker Smith & Wesson (SWHC) were tripped up this week on news of three analyst downgrades to Neutral.
And with shares of the Springfield, Mass.-based gunmaker up more than 80% over the past 12 months, along a steady trajectory, many are now wondering if the time is right to load up on stock.
"Smith & Wesson just got ahead of itself," Longroad Asset Management founder Paul Couglin said in a Tuesday interview with Real Money. "So it went from being up 26% on the year to up 7%. Americans like guns and I don't think anything is stopping that."
Coughlin maintains a portfolio of about a dozen stocks tied to alcohol, firearms and tobacco stocks (which yielded a gross return of more than 25% last year), and expects the mounting political rhetoric surrounding gun regulation to only increase the U.S. appetite for guns, especially as the presidential primary season comes to a head.
"Its such a lightening rod," he said. "The Second Amendment will be a hot bed and it'll be interesting."
And most analysts on Wall Street appear to agree with Coughlin's outlook. Of Smith & Wesson's eight listed analysts, the average 12-month price target is $30 for SWHC stock, with no analysts maintaining Sell ratings, based on consensus data compiled by Bloomberg.
Regarding the three downgrades Monday -- by CL King, BB&T and Cowen -- the principal rationale cited was that booming U.S. demand for firearms is decelerating, but increasing nonetheless, based on figures provided by the National Instant Criminal Background Check System, or NICS.
"While there isn't an exact one-to-one correlation between gun sales and NICS checks, NICS is seen as the best overall indicator of monthly gun sales. As expected, we saw another strong month of sales, albeit showing a deceleration versus the prior couple of months," Wedbush analysts said in a Monday report on Smith & Wesson. "Overall NICS checks grew 9% in March. Prior to the Brussels attacks we were looking for about 8% growth in March, and expecting around 10% after the attacks (given that the attacks happened towards the end of the month) so the March numbers were in line with our overall estimates."
Wedbush maintains a Neutral rating on Smith & Wesson and a $26 price target.
BT&T also expects robust U.S. gun sales throughout the year, although rival gunmaker Sturm, Ruger (RGR) "is better positioned to take advantage of these near-term tailwinds," analysts Brian Ruttenbur and Corbin Allen said. BT&T maintains a Buy rating on Sturm, Ruger, and a Hold on Smith & Wesson.
"In summary, our opinion on the firearms stocks has not changed dramatically," Ruttenbur and Allen said. "We believe trends will remain positive through the fall election season. In our view, the recent increase in firearms sales are driven by fears of politically-based restrictions on certain classifications of firearms or restricting who can own a firearm (all second amendment rights issues). As the general election draws closer, we believe fear will be maintained and we therefore believe 2016 will be a banner year for firearms sales."