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I talked about some ideas related to Trump’s initiatives
after he took over the power. And today a quick idea related to the Hillary’s
loss for the presidency election.
If you are not aware of, Hillary is a big advocate for
controlling firearms during her campaign and there was a widespread fear that
people would not be easily buy guns if HC got elected. Again, I’m not talking
about politics here and your opinion on the gun control has no interest to me.
From the pure investing perspective, the firearm companies had greatly
benefited from the expectation that HC had a good chance to win. So people were
rushing in to buy guns before too late. As such virtually all the gun stocks
were going up substantially before the election. Then the unexpected drama was
unfolded when HC lost surprisingly. When
the fear was instantly gone with more strict gun control, the euphoria for the
gun stocks also got burst immediately. They got crashed miserably since Nov 8.
This brings me to the idea about one of the best gun stock, American Outdoor
Brands (AOBC). You probably have
never heard about this name but it is a well-established firearm company, used
to call Smith & Wesson established since 1850s.
 This is a very profitable company with the
profit margin over 15%. Its sales have doubled in the past year and it has
consistently increased its earnings year over year (5 times in the past 5
years). In a nutshell, this is a great company with good ongoing business. But
the stock prices are not necessarily aligned with the underlying business
status during the short term, but more related to the mood of traders. As you
can see from the chart, AOBC has moved up sharply in the past two years during the most
intensified campaign period, more than doubled. Clearly there was some euphoria with the perceived high probability of HC’s election winning. Whenever there is euphoria, the crash will also be great if the heightened expectation is not met. This is exactly what has happened post-election and AOBC has got lost most of its gain pre-election, reaching $18 at the latest low. With this kind of freefall, AOBC has become a very cheap stock at the moment. In addition, the sentiment to it has got extreme pessimism with a short interest over 24%, meaning a quarter of traders for AOBC are holding short position betting it will further go down. High short interest is usually a contrarian indicator and when it goes more than 15%, it is already quite extreme. With almost no one is interested in AOBC anymore, a turning point may be not far from the corner. Any piece of good news or even not so bad news could trigger a upside run and if that happens, a monumental short squeeze will occur to push its price to explode as those aggressively short traders will have to rush to buy back shares to cover their short positions. I of course don’t know if and when this may happen but per my experience, this is a good bet at the moment. But don’t bet with your mortgage as it may very well go down further before recovering. If you buy now, maybe use the recent low of $18 as a stop loss if the idea is wrong. |
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