Firearm stocks are on the move today, after American Outdoor Brands Corp (NASDAQ:AOBC) unveiled a disappointing earnings and revenue forecast -- and the resulting sell-off in AOBC, formerly known as Smith & Wesson, has extended to sector peer Sturm Ruger & Company Inc (NYSE:RGR). Both AOBC and RGR are trading sharply lower this morning, bucking an upside bias for the major equity indexes.
The shares of AOBC are falling after the firearm stock issued a grim outlook for its fiscal third quarter, effectively overshadowing a second-quarter earnings beat. The maker of Smith & Wesson guns expects to earn adjusted net income of 7 cents to 10 cents per share on revenue of $170 million to $180 million, falling considerably short of the consensus analyst estimate for a profit of 41 cents per share on $209.4 million in revenue.
In response, Craig-Hallum cut its AOBC price target to $15 from $17, and backed its "hold" rating. American Outdoor Brands stock is down 14.4% at $12.78 in early trading, as today's bear gap has unceremoniously ended the equity's one-day breakout above stiff resistance at its 50-day moving average. The stock has plummeted 55% from its Nov. 8, 2016 pre-election close of $28.45.
Options traders appeared bullish on AOBC ahead of earnings. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the gun stock's 10-day call/put volume ratio of 7.36 ranking in the 82nd percentile of its annual range. This indicates that calls have been bought to open over puts at a faster-than-usual clip during the past two weeks.
However, short interest on American Outdoor Brands represents a healthy 14% of the stock's total available float. At AOBC's average daily trading volume, it would take upwards of six days for the shorts to cover their remaining bearish bets.
As such, it's possible that some of the recent call buyers may have been AOBC short sellers hedging their bets ahead of earnings. Meanwhile, given today's steep drop, short selling is temporarily restricted on the gun stock.
RGR stock is also trading lower in response to fellow firearm producer AOBC's post-earnings plummet, and was last seen down 5% at $53.10. Unlike its sector peer, Sturm Ruger stock has been moving higher in recent weeks, gaining more than 18% since its early-September lows. As with AOBC, though, RGR is still well off its pre-election close of $64.40 from Nov. 8, 2016.
RGR has also become a favorite target of short sellers, with these bearish bets accounting for over 24% of the stock's total available float. At Sturm Ruger stock's average daily trading volume, it would take a lengthy 14 days for the shorts to cover their positions -- but in light of today's sell-off, these shorts currently have little motivation to close out their bets just yet.