A technical pullback in Smith & Wesson Holding Corp (NASDAQ:SWHC) is far from a disaster, but for investors setting their sights on SWHC stock in front of the presidential election should lock and load with a limited-risk bull call spread.
It’s a contentious brand just like “The Donald,” or simply “Trump” these days. But if Trump makes it into the Oval Office, gun manufacturer Smith & Wesson is bound to have much less in the way of Second-Amendment headaches, barring any unforeseen disasters.
Having said that, I’m personally not a fan of Trump. I’m all for stricter gun control. The good news, in my opinion, is that the way things are headed into the November presidential election, I’m on the right side of the vote.
So why on earth would I dare look at SWHC stock with an optimistic eye? Simply looking at Smith & Wesson from an investing standpoint, there are three favorable factors that may interest Trump’s fan base.
First, while there is no magic formula to picking stocks, SWHC does appear to possess some strong characteristics for delivering better-than-average returns for shareholders.
Smith & Wesson, as well as competitor Sturm Ruger & Company Inc (NYSE:RGR), make the grade as investment standouts based upon combining the return on capital and earnings yield into a single value and comparing that value to a universe of stocks.
The magic formula was made popular by hedge fund manager Joel Greenblatt in his best-selling The Little Book That Beats the Market. At this moment, for stocks with market caps in excess of $1 billion, SWHC stock is ranked in the Top 30 of U.S. publicly traded companies using this metric.
SWHC Stock Daily Chart
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In pulling back over the last several weeks and correcting more than 20%, SWHC stock is offering Trump supporters a chance to buy shares at a discount of sorts after hitting a fresh all-time-high.
Additionally and also supportive, the price decline in Smith & Wesson is currently testing the longer-term 200-day simple moving average and 62% retracement level established from the Brexit low.
SWHC Stock Bullish Long Call Spread
The last factor which makes SWHC a standout, especially compared to Sturm Ruger, is Smith & Wesson’s options. SWHC’s calls and puts happen to be a good deal more liquid and offer the opportunity to put together less risky spread positions.
After reviewing the SWHC options board and recognizing the potential for both favorable and unfavorable gap risk tied to the Presidential Election, the Nov $27/$28 bull call spread looks attractive.
Priced for 25 cents with SWHC stock at $25.40, this bullish position will require a move of around 7% on an expiration basis to break even. If the presidential election on Nov. 8 goes well for Trump supporters, a 10% reaction to the upside at expiration will yield 75 cents, or 300% come Nov. 18.
If more people than not agree Trump’s the disaster come election time, however, at least your $25 spent will prove a very small contribution with risk limited to, ironically enough, “the 1%” required of a long stock position.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
