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While the Donald Trump rally has lifted many boats on Wall Street since the November elections, firearms manufacturer Smith & Wesson Holding Corp (NASDAQ: SWHC ) - soon to be American Outdoor Brands Corp. - was more than left out in the cold.
Source: Greta Ceresini via Flickr
In fact, the stock is down nearly 15% since the election, as Wall Street factored in lower gun sales due to a Republican victory. But with earnings later this week, a recent Black Friday statistic may have traders rethinking their stance on SWHC stock.
Historically, Democratic wins have been a boon for the gun industry, as the threat of increased regulation sends gun enthusiasts on a firearms and ammo binge. Republican wins tend to create a lull in buying activity due to complacency on regulation.
However, the FBI reported that this Black Friday saw a record number of background checks for prospective gun owners.
While Black Friday numbers clearly won't influence Smith & Wesson's second-quarter earnings figures tomorrow evening, it could have an impact on guidance. With many investors likely expecting conservative earnings and revenue figures in the wake of Donald Trump's win, better-than-expected figures going forward could be a significant boon for SWHC stock.
For the record, Smith & Wesson is expected to post a second-quarter profit of 56 cents per share, more than doubling earnings in the same quarter last year. Revenue is expected to soar more than 58% to $227.61 million.
Actual expectations may be a bit higher, however, with EarningsWhispers.com reporting a second-quarter whisper number of 60 cents per share.
On the sentiment front, there is plenty of room for improvement, which could bode well for SWHC stock bulls. Specifically, Zacks reports that only three of the nine analysts following Smith & Wesson rate the shares a "buy" or better. The 12-month consensus price target of $28.70, meanwhile, represents a nearly 20% premium to yesterday's close.
Positive guidance from SWHC could shake loose some of these "holds" and potentially elicit a price-target increase or two.
Not all of SWHC stock's sentiment backdrop is on point, though. Short sellers, for instance, have accumulated a position of more than 11.6 million shares, representing some 21% of SWHC's total float, or shares available for public trading. This, too, could be a positive for bullish Smith & Wesson traders, as a rally could squeeze these shorts into buying back their positions, thus providing additional buying fuel for SWHC stock.
And short sellers are looking more than a bit nervous heading into tomorrow's report, if Smith & Wesson's options backdrop is any indication. Currently, the December put/call open interest ratio arrives at 0.51, indicating that calls nearly double puts among options most affected by tomorrow's report.
Since short sellers often purchase calls as a way to hedge their positions, especially ahead of events such as earnings, this could be an indication that even SWHC stock bears are expecting an earnings rally.
Click to Enlarge Overall, December option implieds are pricing in a potential post-earnings move of about 9.75% for SWHC stock. This places the upper bound at $26.38, while the lower bound lies at $21.70 from Wednesday's open. A sell-off would push SWHC stock down for a retest of its November lows, while a rally would lift the shares back above all of its short-term moving averages, potentially creating a "buy" signal for technical traders.
2 Trades for SWHC Stock
Call Spread: For those looking to bet on a SWHC stock rally following earnings might want to consider a Dec $25/$26 bull call spread has considerable potential. At last check, this spread was offered at 33 cents, or $33 per pair of contracts. Breakeven rests at $24.33, while a maximum profit of 67 cents, or $61 per pair of contracts, is possible if SWHC stock closes at or above $25 when December options expire.
Put Sell: Alternately, if a more neutral-to-bullish stance fits your trading style better, a Dec $20 put sell has a high probability of finishing out of the money. At last check, this put was bid at 20 cents, or $20 per contract.
As usual with a put sell, you keep the premium as long as SWHC stock closes above $20 when December options expire. On the downside, if SWHC trades below $20 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $20 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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