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(<137>© <137>Max Whittaker <137>/ Reuters<137>/REUTERS)

Stocks to Watch

Stock to watch: Smith & Wesson stages an unexpected rebound Add to ...

Smith & Wesson Holding Corp. Tuesday’s close: $10.22 (U.S.) a share

52-week trading range: $5.14 to $11.25 a share

Annual dividend: none

Analysts’ ratings: There were three buys, four holds and no sells, according to Bloomberg data. Target prices ranged from $9 a share estimated by Wedbush Securities analyst Rommel Dionisio to $18 a share by Northland Securities analyst Reed Anderson.

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Recent history: Shares of the U.S. gun maker plunged in the wake of the Sandy Hook school massacre in December, and have been under selling pressure lately because of pension funds divesting their holdings. But its stock has still managed a robust 90-per-cent return over the past year. Smith & Wesson shares were gaining traction before and since last fall’s re-election of U.S. President Barack Obama because of fears that he would bring in gun control law. Its stock, which hit an intraday 52-week high just prior to the shooting, has been rebounding recently as sales of firearms soar on continued worries by consumers about being deprived of their right to buy guns. Last week, rival firearms maker Sturm Ruger & Co. reported a fourth-quarter profit that exceeded analysts’ estimates.

Manager insight: When Smith & Wesson reported its third-quarter results after the markets closed on Tuesday, its profit of 26 cents a share beat analysts’ estimates of 23 cents, while sales of $136-million also surpassed expectations. There could be a bit of a selloff on profit-taking, but “I think that it will regain any lost ground, and move to new highs,” says Stephen Rogers, a portfolio manager with Toronto-based Horizons Investments Inc. (He does not owns shares in Smith & Wesson, but owns Sturm Ruger stock.)

While investors often pile into shares of gun makers after crimes, such as the tragedy at the movie theatre in Aurora, Colo., last summer, the opposite occurred after the Connecticut massacre.

“Smith & Wesson has not regained the level of where it was before the Sandy Hook shooting” despite a spike in gun sales, Mr. Rogers said. Background checks requested by gun dealers to the Federal Bureau of Investigation – a key indicator of gun sales – jumped 49 per cent in December from a year earlier, and 81 per cent in January versus the same month in 2012.

“Additional positive news on industry sales will potentially give Smith & Wesson, or both of them [including Sturm Ruger] a kick,” he said. Smith & Wesson shares are cheap, trading at only at 10 times forward earnings, while Sturm Ruger is more expensive at about 16 times, he said. But Smith & Wesson will have a bigger move on any given day because “it is a riskier stock” as it has a less solid balance sheet than its competitor, which has no debt and does provide special dividends, he added.

Shares of the pure-play gun companies are likely to climb as proposed gun control regulations get watered down, he said. But ethical and legal issues still surround the industry. “The news driving the stocks – the threat of regulation – is not going to go away. … The debate over any proposed legislation is going to take a long time to play out.”

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