Buy or Sell? Friday’s Winners: SWHC, COO

Among the biggest winners in Friday’s early trading are Smith & Wesson (Nasdaq: SWHC) and Cooper Cos. (NYSE: COO).

Soon after President Obama took office, gun sellers did a brisk amount of business on fears that firearms laws would soon become more restrictive. This chart of gun maker Sturm Ruger (NYSE: RGR) paints quite a picture. Its shares rose nearly 1,000% before a recent pullback.

More recently, these stocks have been cooling off under the theory that “everyone who wants a gun now has a gun.”

#-ad_banner-#Perhaps the “gun trade” may have more life. With President Obama leading in the polls, gun sales are apparently moving higher, according to firearms maker Smith & Wesson. On Thursday evening, the company reported a 48% jump in fiscal first-quarter sales to $136 million, well ahead of the $129 million consensus forecast. And whereas analysts had been anticipating sales in the current quarter to fall back to $118 million, the company says that orders remain strong and sales will be at least $130 million. Full-year sales guidance was increased to a range of $530-54 million from $485-505 million, representing a roughly 30% gain from fiscal (April) 2012.

Unlike Sturm Ruger, Smith & Wesson had not previously been as much of a beneficiary of the “gun trade.” While Sturm Ruger’s sales grew 81% in the first three years of President Obama’s term, Smith & Wesson’s sales grew a more modest 22%, or less than 10% annually.

Perhaps the company’s current momentum is a sign of rising appeal among gun owners for Smith & Wesson. A positive sign for future results: Smith & Wesson’s backlog spiked 130% from a year ago to $392 million.

Looks can be deceiving
When a company tops profit forecasts, you need to dig deeply into the numbers to see just why the quarter was so good. That thought comes to mind after parsing the results of Cooper Cos., a healthcare firm that primarily focuses on contact lenses and women’s healthcare.  Though Cooper delivered a stellar quarterly report Thursday evening and though shares are hitting new all-time highs, looks can be deceiving when it comes to the company’s growth prospects. Earnings per share (EPS) grew an impressive 26% in the company’s fiscal third quarter, to $1.36, but sales grew just 8%, to $378 million.  For a bit of context, Cooper has not boosted sales in any given year in the past decade, except when it has made an acquisition.

Third-quarter earnings were almost completely due to a lower-than-expected tax rate. In other words, investors are bidding up a stock 7% this morning that really just met estimates (when lower taxes are excluded).

Make no mistake, Cooper’s projected profit growth is decent. Citigroup has just upgraded its earnings model and sees earnings rising 11% this year to $5.06, 11% in fiscal (October) 2013 to $5.61 and 12% in fiscal 2014 to $6.28. Yet shares now trade for more than 15 times that fiscal 2014 forecast, and it’s very hard to justify any higher multiple than that.  This is a solid company, but you want to own it when shares are not quite so fully valued.

Action to Take –>
Smith & Wesson has already made a huge run off its low, though it could keep rallying if the odds that President Obama wins re-election continue to strengthen. Analysts at Benchmark Capital see further upside to $13 or around 13.5 times this fiscal 2014 EPS estimate of $0.96. The very strong backlog implies that the stock should at least be able to hold its own in the near-term. The biggest risk:  A Romney victory, which cools off the “gun trade.”