If you have to choose, buy Smith & Wesson and sell Ruger stocks

Progress for the S&P 500, Smith & Wesson, Ruger and Vista Outdoor. (Graph: Bloomberg Business)

A turn of the tide. As gun sales return to what many CEOs are calling a normalized environment, many investors use the value of Smith & Wesson and Sturm, Ruger & Co. stock as a barometer for the gun industry as a whole.

The two companies are the only public companies (selling guns almost exclusively) in the industry and in turn required by law to disclose financial statements on a regular basis. But the difference in value of the two companies was vast (and still is).

For instance, Smith & Wesson stock before the sales boom in 2013 ranged from $5 to $10 per share, and Ruger stock hit somewhere above $30. In the months following 2013, the price per share shot up by at least $10 for both companies and remained high even though sales began to drop off significantly. More recently Ruger has been reporting mediocre to sometimes disappointing results whereas Smith & Wesson has made a series of savvy investments that reflected well on the company’s balance sheet.

Looking at the numbers, Alexander Valtsev posted on financial blog Seeking Alpha writes, “I issue a SELL recommendation on the shares of Sturm Ruger & Co Inc. with a target price range of $47 – $51 per share, which represents a downside opportunity of 10% – 16% from current price levels. Ideally, the short position should be supplemented with a long position in Smith & Wesson Holding Corporation in order to reduce risks.”

“I believe that Sturm, Ruger & Co is significantly overvalued, while Smith & Wesson trades slightly below its fair value. In addition, Smith & Wesson has a slightly higher beta,” he writes and adds, “Because Smith & Wesson has a slightly higher beta, there is a protection in the event both stocks move in the upward direction.”