Gun Stocks Are a Risky Play in 2017 -- Here's Why

The stock prices of major gun manufacturers Sturm Ruger & Company (RGR)  and Smith & Wesson (SWHC)  haven't had a good year. 

Sturm Ruger is down more than 11% year to date. Smith & Wesson, which plans to rename itself American Outdoor Brands soon, is down 3.0%. 

Cabelas  (CAB) , a retailer of guns as well as hunting and fishing supplies, has seen its shares rise 32% this year. It may be a better investment in 2017. Still, there are better growth opportunities in other industries, including defense stocks Lockheed Martin and Northrop Grumman.

At the root of the problem, some analysts expect gun sales to slow in 2017, and that bodes poorly for industry share prices.

Sturm Ruger & Company's revenue is expected to decline by 8.9% in 2017 by the lone analyst covering the company. Also, even after the stock's correction in 2016, it still is trading close to that analyst's $53.00 price target.

Some analysts see Smith & Wesson as being somewhat insulated in a downturn because the company has already given weak guidance for its next quarter.

Also, the company has restructured itself to be more than a pure play on firearms. Outdoor products are a growing area of focus for Smith & Wesson, placing it in the same space as Vista Outdoor which also has exposure to outdoor gear and firearms.

But analysts are forecasting less than 2% revenue growth for Smith & Wesson in the fiscal year that ends in April 2018. That would mark a strong deceleration from the 28% revenue growth analysts are predicting for the current fiscal year, which ends in April 2017. 

Analysts are expecting some growth in Cabela's top and bottom lines. The specialty retailer provides equipment for hunting, fishing, camping and related outdoor merchandise. The company is on track to merge with privately held Bass Pro Shops.

Next year looks uncertain at best for gun stocks.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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