We are closing out our short idea in Smith and Wesson.  We are also removing the SWHC short position from our PAA Research SMid Cap portfolio.  Even though we think consensus estimates remain too high in light of building inventory in the gun dealer channel, we think the current stock price reflects the fundamental downside scenario.  There is no question that the “Obama Effect” on firearms sales has peaked and has begun its decline.  In all candor, we thought the fall-off in firearm sales would be more precipitous than it has been thus far.  Both the NICS background check data and monthly traffic to leading online gun dealers suggest that sales have stabilized at relatively high levels over the past few months.  We view these as two of the better external indicators of industry-wide firearm sales activity in the U.S. In the month of September, the number of background checks for the purpose of purchasing a gun increased 12.4% YOY according to the FBI.

Source: FBI

Overall traffic to the top five leading online gun dealers increased 28.0% YOY and declined 1.3% month-to month.  The aggregate number of unique visitors has declined 23.7% from the December 2008 peak.

Source: Compete.com

Overall, a short position in SWHC returned 10.6% from the time we introduced the idea compared to a 18.0% return for the S&P 500 over the same time period, a decent outcome.  SWHC shares now appear fairly valued relative to our expectations for a continued decline in demand for firearms. 

As always, please act accordingly….