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Josh Enomoto

Feeling Bold? Sportsman’s Warehouse (SPWH) Offers a Controversial Wager

By logical deduction, outdoor products retailer Sportsman’s Warehouse (SPWH) seems an incredibly risky investment, one that runs counter to common sense. First and foremost, Sportsman’s carries an awfully controversial profile. As one of the top sellers of firearms, SPWH stock will always be anathema to many conscientious investors. Critically, the tragic rise in gun violence inherently clashes against general sensibilities.

Nevertheless, another aspect to the controversial matter exists and that comes down to pure economics. As I pointed out two months ago, the firearms industry employs hundreds of thousands of people. It’s not just about the 153,414 direct jobs that the sector supports. Rather, the entire value chain helps indirectly put food on the table for many hard-working families.

Therefore, part of the reason why the political machinery has been frustratingly slow – according to gun control advocates – is not that individual lawmakers don’t care about the crisis. It’s just anathema to propose policies that may hurt innocent families, especially at a time of increasing financial challenges.

Still, while SPWH stock may not be in danger of being cancelled outright, it faces substantial headwinds from declining firearms sales relative to their pandemic-fueled peak. Based on firearms background check data from the FBI, about 39.7 million firearms were sold in the U.S. in 2020. Sales dipped slightly in 2021 and precipitously in 2022 as social normalization trends kicked in.

With another decline likely by the end of this year – and fallout associated with Sportsman’s canceled merger with Great American Outdoors – SPWH stock now seems a lost cause. Add in some rough unusual options activity and we have a clear sign to sell.

Or do we?

Unusual Options Volume Presents Nuanced Take on SPWH Stock

Following the close of the Aug. 25 session, SPWH stock represented one of the top highlights in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 4,533 contracts against open interest of 3,435. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 1,773.14%.

Looking at the transactional breakdown, call volume saw only 128 contracts. This tally paled in comparison to put volume of 4,405 contracts. With this pairing yielding a put/call volume ratio of 34.41, as an outside observer, circumstances don’t appear favorable for bulls of SPWH stock. However, the put/call open interest ratio sits at 0.39, presenting an interesting framework.

Still, 100% of the unusual put volume can be attributed to the $5 contract with an expiration date of Sept. 15, 2023. Again, volume came out to 4,405 contracts against open interest of 271. Due to a combination of high demand and low liquidity, the bid-ask spread of the put as represented by its midpoint price (38 cents) came out to a very wide 33.33%.

As if bears needed further confirmation, the Barchart Technical Opinion indicator rates SPWH stock an 80% strong sell. Fundamentally, as stated earlier, U.S. gun sales are declining. Based on the current run rate, firearms sales may hit 30.8 million units, a dip from the 31.6 million posted in 2022. That seems to confirm the technical pessimism against SPWH.

However, the devil might be in the details. In the 13 weeks ending April 29, 2023, Sportsman’s revenue allocation tied to its hunting and shooting department hit 63.2%. That’s a noticeable increase from the year-ago quarter’s 60.3%. This suggests the people who bought guns during the COVID-19 crisis are now loading up on ammunition.

To clarify, revenue did fall to $267.5 million from $309.5 million. However, most other Sportsman’s business units slipped year-over-year. Thus, the company’s shoppers may be hurting but when they do spend, they’re spending on ammo. Cynically, that’s a hidden positive for Sportsman’s due to so many guns sold during the COVID-19 crisis.

Subsequently, given the dramatic rise of the shooting sports industry’s total addressable market, SPWH stock might not be as terrible of a speculative contrarian investment as it initially appears.

Sportsman’s Warehouse Isn’t for Everyone

To be sure, betting on SPWH stock isn’t for everyone. Since the start of the year, shares stumbled nearly 47%. As well, Sportsman’s lost its post-COVID gains. Over the trailing five-year period, SPWH is down almost 14%. Those are not encouraging figures.

In addition, investors must keep an eye on the political narrative. Based on a recent Reuters report, President Biden doesn’t appear particularly popular, with his approval rating stagnant at 40%. If a Republican wins the White House, it’s probably unlikely that the incoming president would institute gun-unfriendly policies.

On the other hand, I’m not entirely sure that it’s fair to label SPWH stock a foregone conclusion as a bearish trade. Yes, it’s had significant setbacks, both internally and from external headwinds. However, even with declining firearms sales in the U.S., there were many, many guns purchased throughout the pandemic.

To “feed” them requires ammo, which is where SPWH may be a farfetched but compelling upside opportunity.

More Stock Market News from Barchart

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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