Whoa! My Stock Defied the Market!

Fears of Europe's new recession and China's skidding sent the Dow down yesterday, with component companies like Caterpillar and Alcoa -- both of which are heavily dependent on international markets --taking it on the chin. But just because your stock strapped on a rocket pack and went higher instead, resist the urge to high-five everyone in the cubicles next to you.

Smart investors won't celebrate until they know why their stock surged. Without a fundamental basis for the bounce, these stocks can quickly make the return trip down.

Is now the time to lock in profits, or is this just the first step toward even higher valuations down the road? The market fell 78 points yesterday, the third day in a row it's fallen and the fourth out of the last five, so stocks that went appreciably higher are pretty big deals. But let's see whether they're truly headed into orbit.


CAPS Rating
(out of 5)

Thursday's Change

Sturm, Ruger (NYS: RGR)



Smith & Wesson Holding (NAS: SWHC)



Setting sights on growth
The recent shooting of a teen in Florida has renewed calls for stricter gun laws and questioned the validity of a "stand your ground" law there, a principle that an individual has no duty to retreat when attacked.

Yet despite the protests that erupted in the wake of the shooting, results from both publicly traded gunmakers Sturm, Ruger and Smith & Wesson Holding suggest investors don't think there will be any long-term backlash against the right to keep and bear arms. The former reported sales were so strong lately that it actually had to stop accepting new orders.

That should probably have been expected since it was only a few weeks ago that Smith & Wesson beat expectations and reported a return to profitability and saw a 60% jump in its backlog. It's trickled down to retailers, too, as sporting goods chain Cabela's (NYS: CAB) enjoyed an increase in merchandise gross margins primarily as a result of "significant strength" in gun sales.

It could be that consumers actually do expect a coming backlash, and that's why they're rushing to place their orders while they still can. A similar spike in sales followed President Obama's election in 2008 as it was feared a major gun grab initiative would be launched. That never materialized, but with a presidential election looming again, it seems the same mind-set might be at work.

FBI background checks for firearms purchases have soared almost 64% since 2006, and so far in 2012, they're running 12% ahead of the pace set in the same period last year (which itself was up 17% from the year before). While the law enforcement agency says there's no one-to-one correlation between background checks and gun sales, one can still make the assumption that if more people are looking to buy guns, there are going to be more sales.

The move toward personal protection has filtered down to other defensive product manufacturers. TASER (NAS: TASR) posted disappointing fourth-quarter results and had to write down inventory, as stun gun sales fell 7% from the year-ago period. Security outfits also haven't seen gains. Tyco's (NYS: TYC) integration of Broadview Security continues to serve as a drain on segment performance as it integrates it into the ADT Security division.

CAPS member tcadvisors sees the long backlog as proof positive of future growth for Sturm, Ruger while nugranee says a populace fearful of rising crime rates will arm itself for protection.

Tell me in the comments section below or on the Sturm, Ruger CAPS page and the Smith & Wesson Holding CAPS page if you agree a good offense begins with a solid defense, then add the gunsmiths to the Fool's free portfoliotracker.

Going into orbit
These two companies may have divergent futures despite their short-term bounce, so check out for free the one stock The Motley Fool thinks will break all the rules to win. Hurry though, because the free look at the new report "Discover the Next Rule-Breaking Multibagger" is available for a limited time only.

At the time thisarticle was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Cabela's. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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