Why Smith & Wesson Shares Turned Cold

Why Smith & Wesson Shares Turned Cold

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Smith & Wesson were backfiring today, falling as much as 10% on a sector-wide decline after an analyst said gun buying may have peaked, and downgraded Smith & Wesson.

So what: Gun purchases had spiked in the aftermath of the Newtown massacre, as gun buyers rushed to increase their stockpile on fears of increased government regulation. But Scott Hamann of KeyBanc Capital Markets said he sees a meaningful slowdown in demand in the fourth quarter and the first quarter of next year. Hamann dropped his rating on Smith & Wesson from hold to underweight, noting its exposure to the AR-15-style assault rifle, which the Newtown gunman used, as he sees demand for that particular gun falling off.

Now what: It's surprising to see shares falling so much in response to Hamann's downgrade, as his analysis really isn't anything new. There was a clear cause to the spike in gun purchases, which was eliminated when the gun control bill written in response to the Newtown shooting died in the Senate in April along with the possibility of tighter gun laws. Guns are a durable good and, therefore, have finite demand, unlike bullets, for example; therefore, it only makes sense that gun sales would ease once the fear driving the purchases was gone. Smith & Wesson will report earnings on September 2. Analysts are expecting a per-share profit of $0.36, down from $0.44 in the quarter that ended in April.

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The article Why Smith & Wesson Shares Turned Cold originally appeared on Fool.com.

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