Greater demand for firearms couldn't prevent shares of gunmaker Sturm Ruger & Co (RGR - Get Report) from falling as much as 6% Wednesday to a session low of $64.65. That decline sent the company's shares below all three key benchmarks: The 20-day, 50-day and 100-day moving averages.
Why are the shares falling? On Tuesday, Sturm Ruger reported a 19% rise in revenue and an adjusted profit of $1.22 per share, which beat analyst estimates, driven by the rise in the number of firearm sales as evidenced by FBI's taxed National Instant Criminal Background Check System. But here's the thing: The 19% second-quarter revenue increase translates into growth that was seven percentage points slower than the first quarter when revenue grew by 26%.
What's more, while the company's permit applications grew almost 28%, it also marks a sharp 20% sequential decline. The two metrics would suggest that Sturm Ruger is seeing some decelerating growth. And with its stock having climbed as much as 23% since June 10, it was time to take profits.
Despite what might now appear as an attractive entry point in Sturm Ruger shares, things can still get worse. The charts suggests a buy point near $60 a share, or about 10% lower, could emerge some time in the second half of the year. Take a look at the chart, courtesy of TradingView.
As the chart shows, Sturm Ruger shares hit a wall at around $69 since their massive rise from around $57 a share in early June.
The stock has gone sideways since then, presumably waiting for the company's earnings announcement. Investors wanted confirmation they didn't receive. If anything, Sturm Ruger, which announced its CEO succession plan today, has introduced uncertainty.
The combination of new leadership and decelerating growth will pressure the stock going forward. Sturm Ruger shares, which on average are rated hold by analysts, will now be tested at its support level of $65. And if it can't hold, $60 becomes the next target. It's at that point the shares should be bought, not before.