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Will Smith & Wesson Make Your Day?


On top of the potentially very lucrative rifle and shotgun market, Smith & Wesson is looking to regain the leadership position it once enjoyed in the law enforcement market.

"Sweet talkin' people done ran me out of town
And I drank enough whiskey to float a battleship around
But I'm leavin' this game one step ahead of you
And you will not hear me cry cause I do not sing the blues."

-Gimme Back My Bullets (Allen Collins and Ronnie Van Zant)

As long as I can remember it has been a toss-up for me in terms of my favorite band of all time. The Allman Brothers, Zep, Aerosmith - all right there - but truth be told, Skynyrd comes out on top. Although this particular number was not on Street Survivors, the rock historians among you will recall the original album cover released on October 17, 1977 had a picture of the band engulfed in flames - of course three days later their chartered plane, headed to Baton Rouge, crashed, killing Ronnie Van Zant, Steve Gaines and his sister Cassie along with three other non-band members. MCA did a quick about face and put out the all-black background cover.

So, as usual, you are probably asking "Where are you going with this, Guy?" Well, looking at the song title above, I give you Smith & Wesson (SWHC). It is due to report its 1Q fiscal 2008 earnings today after the bell. The "Street" is looking for $0.09 EPS on about $71.86 mln in revenues. This is a stock I have loved for quite a while and have actually talked about a few times on the show "Fast Money".

But today I am hoping that it misses earnings badly! Why, you ask? The stock has more than doubled since starting the year, trading around $10. Hard for me to "chase" the name at this point, so by looking for an earnings "miss" I am hoping to see a much needed sell-off in order to scoop the stock up at more reasonable levels. The question that begs to be asked, of course, is "Well, if it misses, why would I still be positive on the stock!?" Thanks for asking!

The meat and potato business for Smith & Wesson has been the U.S. handgun market - and frankly, since Clint stopped doing the Dirty Harry movies, how many handguns can it really sell? Smith & Wesson realizes that as well and to that end, it is entering the $1.1 bln shotgun and rifle market, which is about 80% larger than their core handgun market, much to the chagrin of Michael Moore but no doubt much to the delight of Charlton Heston, I imagine. But, as usual, I digress.

On top of the potentially very lucrative rifle and shotgun market, SWHC is looking to regain the leadership position it once enjoyed in the law enforcement market. There is also a chance for it to secure contracts with the United States Army to supply soldiers with more powerful sidearms.

Now there is a pretty small float in this stock and a rather large short interest of about 22% - so an earnings beat will take the stock higher as shorts run for cover (bad pun, I know) - so by looking for an earnings miss, I am hoping that the shorts will get their collective beer muscles out and lever an already tenuous short position.

The other thing worth mentioning is, with an enterprise value of $965 mln, this could be an interesting takeover target just for the cache of its name alone.

So keep your eyes open after the bell - and remember! - don't be trigger-happy on an earnings beat: keep your powder dry and look for a miss!
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No positions in stocks mentioned.

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