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The Gunsmiths

June 27, 2013

Drama. Guns, or “hand cannons”, were invented in the 10th century in order to kill people at a distance, but the first hand-revolvers were invented and patented in 1836 by Samuel Colt who based their design and ratchet action on the sailing ship’s capstan. The company that he founded, the first of which went bankrupt on quality issues, still exists today as the privately owned Colt’s Manufacturing Company LLC in Hartford, Connecticut.

Yuan Dynasty Hand Cannon 13th Century Courtesy: Wikipedia

Yuan Dynasty Hand Cannon 13th Century
Courtesy: Wikipedia

Notwithstanding the purpose of the handgun, there are over eighty public and private firms that design, engineer, and manufacture handguns, and, obviously, it’s an industry that we ought to know more about (for example, The Street, June 26, 2013, Smith & Wesson Scores Another Perfect Round) that is no more perilous or compelling, per se, than The Hershey Company or General Motors as businesses that depend on consumer tastes or desires.

1836 Colt Revolver

1836 Colt Revolver
“The Original Peacemaker”
$1 Million Sold To A High-Tech Entrepreneur

Guns are sold in many ways and for many purposes, but the most common allure is either the 2nd Amendment Rights (and expectations) or that of a fine perfume in the drawing rooms of the nation, so to speak, and six of these companies have gone bankrupt or out of business since 1985 and five since 1997.

Moreover, the gunsmiths tend to be small companies, and many of them are privately owned, and those that are publicly traded tend to be avoided by the institutions and, accordingly, their stock prices respond to something other than programmed institutional trading.

But they could very well end up in the hedge fund or alternative investment bought by our pension funds which purpose is quite the opposite of the handgun but with the same results if they can’t, or won’t, pick up their performance and provide capital guarantees and a hopeful return above the rate of inflation in practice and not just in their fantasy and idle promises.

Original Smith & Wesson Factory in Springfield, Massachusetts, Circa 1920

Smith & Wesson Factory in Springfield, Massachusetts in 1920
Courtesy: Smith & Wesson Holding Corporation

The Street (ibid, The Street, above) is enthused by the “bull’s eye earnings” which have turned the misfortunes of the original Springfield, Massachusetts, company into a “money printing press”, they say.

Smith & Wesson became eligible for the Perpetual Bond™ in early 2012 at $6, and we might have picked it up earlier with a call option, but didn’t buy it until later at $9, and we have been saved several times from a misfire with our mandatory stop/loss and re-loaded at a lower price because the company was still trading at or above the price of risk, the Risk Price (SF), and for no other reason. Please see Exhibit 1 below.

It’s trading today at $10 but our estimate of the downside in the stock price due to the demonstrated volatility is still minus ($1.50) and it could be trading at any price between the current price of $10 and $8 to $12 without surprise.

Exhibit 1: (B)(N) SWHC Smith & Wesson Holding Corporation – Risk Price Chart

(B)(N) SWHC Smith & Wesson Holding Corporation

(B)(N) SWHC Smith & Wesson Holding Corporation

Smith & Wesson Holding Corporation is one of the manufacturers of firearms. It manufactures an array of handguns, modern sporting rifles, hunting rifles, black powder firearms, handcuffs, and firearm-related products and accessories.

(Please Click on the Chart to make it larger if required.)

From the Company: Smith & Wesson Holding Corporation provides products and services for safety, security, protection, and sports in the United States and internationally. It offers firearms, handguns, sporting rifles, hunting rifles, black powder firearms, handcuffs and restraints, and firearm-related products and accessories. The company sells its products under the Smith & Wesson brand, the M&P, the Thompson/Center, and the Walther brand names. It also provides metal processing and finishing services, including forging, heat treating, finishing, and plating to third-party customers. The company serves gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies. Smith & Wesson Holding Corporation sells its products through commercial, law enforcement, federal, and military distributors, retailers, and dealers in the United States, as well as through distributors and manufacturers’ representatives internationally. It also operates Websites and an online retail store to sell firearms, accessories, branded products, apparel, and related shooting supplies. The company was founded in 1852, has 1,300 employees, and is based in Springfield, Massachusetts.

We’ve had better luck (so to speak) with Sturm, Ruger & Company that entered the Perpetual Bond™ at $12 in 2010 and is still in the Perpetual Bond™ at the current $50. The company also pays a dividend of $0.49 per share per quarter or $40 million per  year to its shareholders for an extraordinary current yield of nearly 4% that is as electrifying as the Dow Utilities companies. Please see Exhibit 2 below.

However, our estimate of the downside risk in the stock price due to the demonstrated volatility is minus ($6) per share so that it could very well be trading anywhere between the current $50 and $44 to $56 without surprise for the next several months.

The options are thinly traded but we bought the October put at $45 for $3 per share today and partially offset the cost of that with the sold call at $50 for $2.65 per share, so that for the cost of holding the stock at $50 and the option at $0.35 per share ($3.00 less $2.65), we get a dividend yield of 4% and a perfect shot at between $45 and $50 for the next several months.

Exhibit 2: (B)N) RGR Sturm, Ruger & Company Incorporated – Risk Price Chart

(B)(N) RGR Sturm Ruger & Company Incorporated

(B)(N) RGR Sturm Ruger & Company Incorporated

Sturm, Ruger & Company Incorporated is principally engaged in the design, manufacture, and sale of firearms to domestic customers. The Company produces rifles, shotguns, pistols, and revolvers.

(Please Click on the Chart to make it larger if required.)

From the Company: Sturm, Ruger & Company Incorporated engages in the design, manufacture, and sale of firearms in the United States. The company offers single-shot, auto loading, bolt-action, and sporting rifles; single-action and double-action revolvers; and rim fire auto loading and center fire auto loading pistols. It also provides accessories and replacement parts for its firearms. In addition, the company provides investment castings made from steel alloys directly or through manufacturers’ representatives. Sturm, Ruger & Company Incorporated sells its firearm products through independent wholesale distributors to the commercial sporting market under the Ruger name; and exports its firearms directly to law enforcement agencies and foreign governments, as well as through a network of commercial distributors. The company was founded in 1948, has 1,400 employees, and is based in Southport, Connecticut.

Please Click on any of the Links below to learn more about guns, and the astounding business of guns which we will report on as a Perpetual Bond™ similar to the Dow Transports & Utilities in a future Post.

The Gunsmiths Courtesy: Genitron

Accu-TekAmerican DerringerAMTArcus ArmaLite Arminius ArmscorRock Island Armory  Auto-Ordnance BerettaBersaBobergBond ArmsBrowningBULCaracalCharter ArmsChiappaCobraColtCoonanCZDaewooDan Wesson DetonicsDiamondbackEAAEd BrownExcel ArmsFEGFireStormFNGirsanGlockHi-PointHi-StandardHKIWIJimenezKahr ArmsKel-TecKimberKorthLes BaerLionheartMagnum ResearchMauserNAANorincoOlympic ArmsParaPhoenix ArmsRemingtonRexioRohrbaughRossi RRARugerSCCYSeecampSIGSmith & WessonSphinxSpringfield ArmorySteyrSTI InternationalStoegerTanfoglioTaurusUbertiUS FirearmsWaltherWilson CombatZastava

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2006) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.Disclaimer Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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