As we have noted in the past, we are actively following website traffic to the leading online gun dealers to gain a better gauge of current and future demand for firearms. Outside of the monthly data from the National Instant Criminal Background Check System (NICS), we view website traffic to the leading online gun dealers as the best real time barometer of consumer interest in purchasing a firearm. For the third consecutive month and for the fifth month in the past six, overall traffic to the top five gun dealer websites declined month to month. Here are the highlights:

• According to Compete.com, the number of unique visitors to the top five leading online gun dealers declined 11.8% from May to June. A year ago, traffic only declined 1.3% from May to June.
• On a year-over-year basis the number of unique visitors still increased 37.2%, however this is a sharp fall off from the 53.6% YOY growth witnessed in the month of May.
• The number of unique visitors to the top online gun dealers has now declined 34.9% from the December 2008 peak.

The chart below outlines the number of unique visitors to the top five online gun dealers over the past 15-months (click on chart for full image view):

Source: Compete.com

Both SWHC and RGR stocks will trade off the NICS data, which we expect to be released within the next few days. Whereas the NICS data is a proxy for current gun sales, we think the website traffic data is a gauge for current and future gun sales. This data suggests that the “Obama Effect” on firearm sales continues its decline. We continue to recommend shorting both SWHC and RGR. It is difficult to tell how much demand has been “pulled forward” over the past 6-9 months, but it appears more and more likely that firearms sales will start to decline on a year-over-year basis in the back half of the year. Now that evidence continues to mount that the “Obama effect” on gun sales has peaked, we expect investors to increasingly look at normalized earnings for both RGR and SWHC. In the case of SWHC, we view normalized earnings power as $0.20-$0.25, applying a 15-17x multiple would imply a stock price of $3.75-$4.25. For RGR, we think normalized EPS is closer to $0.45-$0.50, which would imply a price of $6.75-$7.50 using a similar valuation.

As always, please act accordingly….