RedBull Money Talk: Hillary＇s loss brings this opp...

I talked about some ideas related to Trump’s initiativesafter he took over the power. And today a quick idea related to the Hillary’sloss for the presidency election.

If you are not aware of, Hillary is a big advocate forcontrolling firearms during her campaign and there was a widespread fear thatpeople would not be easily buy guns if HC got elected. Again, I’m not talkingabout politics here and your opinion on the gun control has no interest to me.From the pure investing perspective, the firearm companies had greatlybenefited from the expectation that HC had a good chance to win. So people wererushing in to buy guns before too late. As such virtually all the gun stockswere going up substantially before the election. Then the unexpected drama wasunfolded  when HC lost surprisingly. Whenthe fear was instantly gone with more strict gun control, the euphoria for thegun 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 OutdoorBrands (AOBC). You probably havenever heard about this name but it is a well-established firearm company, usedto call Smith & Wesson established since 1850s.

This is a very profitable company with theprofit margin over 15%. Its sales have doubled in the past year and it hasconsistently increased its earnings year over year (5 times in the past 5years). In a nutshell, this is a great company with good ongoing business. Butthe stock prices are not necessarily aligned with the underlying businessstatus during the short term, but more related to the mood of traders. As youcan see from the chart, AOBC has moved up sharply in the past two years during the mostintensified campaign period, more than doubled.

Clearly there was some euphoriawith the perceived high probability of HC’s election winning. Whenever there iseuphoria, the crash will also be great if the heightened expectation is notmet. This is exactly what has happened post-election and AOBC has got lost mostof its gain pre-election, reaching $18 at the latest low. With this kind offreefall, AOBC has become a very cheap stock at the moment. In addition, thesentiment to it has got extreme pessimism with a short interest over 24%,meaning a quarter of traders for AOBC are holding short position betting itwill further go down. High short interest is usually a contrarian indicator andwhen it goes more than 15%, it is already quite extreme. With almost no one isinterested in AOBC anymore, a turning point may be not far from the corner. Anypiece of good news or even not so bad news could trigger a upside run and ifthat happens, a monumental short squeeze will occur to push its price toexplode as those aggressively short traders will have to rush to buy backshares to cover their short positions. I of course don’t know if and when thismay happen but per my experience, this is a good bet at the moment. But don’tbet 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 iswrong.