Investor Playbook: Smith & Wesson’s (NASDAQ:SWHC) Recent Share Climb is Just the Beginning of More Upside

I don’t know if it’s a basic human response or a uniquely American one. But when we are threatened with not having access to something on which we’ve grown dependent, we always have the same response.

Is that response to find an alternative? No.

We stockpile!

When it first became a sobering reality that Hostess was closing, we stockpiled Twinkies. When incandescent bulbs were legislated out of existence, we stockpiled them, too.

Arguably, nothing has been stockpiled in greater volume or with more fervor in the last six months than firearms and ammunition. And it’s been great for companies like Smith & Wesson Holding Company (NASDAQ: SWHC).

On June 25, Smith & Wesson reported record-breaking 4Q and full-year 2013 results with tremendous strides made in both revenue and profitability. Its performance was broad based, too – extending across all of its firearm lines including pistols, revolvers, and rifles. Just about the only area the company is currently not involved in is the shotgun category. Smith & Wesson has dabbled in and out of them before over the years, so we wouldn’t be surprised if such a line resurfaced – probably through a key overseas acquisition.

Smith & Wesson is not resting on this success, but is instead buying back stock, retiring debt, and issuing guidance for 1Q14 sales to increase more than 20% compared to the same quarter last year.

And as you might expect, the stock has reflected the company’s good fortune over the past few months. It’s up 23.7% from the close on May 1 to the close yesterday, July 10.

Is this an opportunity missed for non-SWHC holders? Not necessarily… This might just be the beginning of a strong bullish run. As we stated in our original piece on SWHC back on 10/23/12:

“With shares trading below $10 per share, overhead resistance is not meaningfully met until just above $21 per share. Cognizant of the significant potential for upside, we should not forget to pay special focus on downside risk where several points of support can be found at $7.25 per share.”

At the time of the article, SWHC was finishing up a bullish run but had yet to test newly established support at $7.25. While upward resistance could be seen far above, the stock simply needed a break. Afterall, shares had marched forward in a near vertical line from the low $2 per share range to a price near $11.

On 12/21/12 we revisited the company with shares trading at $7.73 per share, which served as an excellent buying area just above the $7.25 support line we had covered for our readers just a few months earlier. We jumped all over this opportunity following up with:

“…a bullish scenario would materialize following a successful test of major support near $7.25. This allows investors to buy in at lower prices and place a protective stop loss below comfortable support to mitigate downside risk and allow price appreciation as shares could advance over the next few years”

Fast forward to today and we’re beginning to see the fruits of our analytical labor unfold. SWHC successfully defended $7.25 and is now above $10 per share. New 52-week highs above $11 would go a long way toward establishing the trend as that would produce a higher-high.

In the chart below, one can view the basing periods for the stock as timely advances keep pessimistic bears at bay.

SWHC Stock Action Keeps Away Selloff

Now, the set of technical signals below the price on the chart (MACD and DMI) are important for several reasons.

First, the bullish divergences circled recently prove that shares are benefiting from a legitimate and underlying bullish force pushing upward. When these two indicators are in agreement with each other you can bet that price appreciation will occur.

Second, the MACD is holding strong above the 0.00 waterline. Bullish runs typically struggle to survive when this is not the case.

If you think it might be too late to profit here, there is no reason to worry. As we said earlier, SWHC is on a course and heading toward our upper resistance target of $21 which would be a 108% gain based on the day and closing price of this article.

Investor Playbook

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