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Shares of firearms companies sold off Friday, after August data on national background checks for gun purchases showed a slowdown from the recent surge.
Yet some viewed the slide as an overreaction, as political debates proposing stricter gun controls should continue to drive short-term demand.
"We're reluctant to over read this data and think today's 7 percent selloff in [Smith & Wesson] is overdone, particularly since a potential Clinton presidential win could backstop gun demand," Cowen & Company analyst Cai von Rumohr said in a research note.
On an unadjusted basis, the FBI's National Instant Criminal Background Check System (NICS) data showed August checks totaled 1.85 million, a 6 percent increase year-over-year. That's a significant slowdown from July's 37 percent growth and June's 39 percent pace. On a sequential basis, August's unadjusted checks fell almost 16 percent, from more than 2.19 million recorded in July.
Adjusted NICS data supplied by the National Shooting Sports Foundation is sometimes used by analysts as a proxy for retail gun sales, since it excludes concealed carry weapon permit background checks. The adjusted NICS for August showed 1.21 million checks. That's up 17 percent from a year ago, and is essentially flat on a sequential basis from the July data. July's adjusted background checks were up about 28 percent on a year-over-year basis, and June's total adjusted checks were up almost 29 percent.
The Cowen analyst said gun demand is "affected by political rhetoric and could be bolstered by potential for a Clinton presidential win. This could boost gun sales in anticipation of possible stricter gun controls, a phenomenon that led to the late 2008 surge when Obama won the White House."
After the market closed Thursday, Smith & Wesson reported fiscal first-quarter earnings that were above Wall Street expectations, and raised its full-year revenue and net income guidance.
Still, Craig-Hallum Capital analyst Steven Dyer downgraded the company's stock to "hold," saying, "We believe the current firearms demand environment will be 'as good as it gets' for now." He added the "tough NICS comps will limit revenue growth" for the company's second half.
"We have a difficult time telling investors to step to the sidelines given the current environment and how well management has executed during this cycle, but at current levels, the risk/reward has shifted enough that our current price target cannot justify a buy rating."
Despite Friday's selloff, Smith & Wesson shares are up nearly 26 percent so far this year, and are ahead more than 50 percent over the past year.