Smith & Wesson

Smith & Wesson: Lock and Load
by James Boric
The Rude Awakening
Wall Street, New York
Friday, April 12, 2006

James Boric discusses the legendary gun manufacturer Smith & Wesson.

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[Joel's Note: Every month your Rude editors scour the
newsletter industry's best newsletters to find the freshest
ideas and the most interesting insights to share with you.
Once a month, the faces behind some of these letters and
trading services reveal themselves.

Congregating in a restored Baltimore mansion, the editors
of the Agora Financial group discuss their latest market
observations and ideas. As you saunter around the table you
may hear discussions and friendly debates about everything
from macroeconomics to geopolitics, peak oil to consumer
spending, the tactics of options hedging to the whereabouts
of the ensuing happy hour.

It is always a treat to hear these blokes, leaders in their
respective fields, discussing tomorrow's big ideas. Each
editor has his own particular method of making money in
the markets and their own way of presenting it to the group.
For sheer, unbridled excitement it is always difficult to go
past small-cap specialist, James Boric. Yesterday was no
exception. In the coming weeks you will be invited to join a
very select service that James has been busy perfecting for
the past few months. As an attendee at these editorial
meetings, I have witnessed the evolution of a service that is
set to change the way you think about investing in small-
cap companies. The service is called the Small Cap Insider.

While Mr. Boric is putting the final touches on the Small
Cap Insider, we thought it would be great to invite him in
to share a few of his insights on this highly profitable realm
of investing…

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Lock and Load
By James Boric

"Insiders might sell their shares for any number of
reasons," Peter Lynch, the longtime Magellan Fund
manager, famously declared, "but they buy them for only
one: They think the price will rise."

Applying Lynch's reasoning, Tweedy Browne (one of the
most respected small-cap money managers on Wall Street)
found that tracking insider buying is one of the five most
proven ways to make money in the stock market. I agree.

In fact, I have come to believe that no single bit of
information contains more investment value than insider
buying. (Which is why I recently launched the Small Cap
Insider.)

Take for instance Smith & Wesson Holding Corp.
(SWB:AMEX). For the past several months, insiders at the
company have been buying the stock at ever increasing
prices. The heavy insider buying is easy to understand in
light of the company's strong profit growth trend.

Smith & Wesson: Still Growing at 150+

Smith & Wesson is the most famous gun manufacturer in
the world. It's been around since 1852. And in that time
frame, hundreds of police and government forces have used
Smith & Wesson firearms. In fact, its .38 Special has been
in continuous production since 1899. To date, over 6
million units have been produced.

Normally when you think about a company that is 150
years old (plus), words like "mature" and "stodgy" come to
mind. You rarely think growth. But in Smith & Wesson's
case, growth is exactly what you should be thinking about.

The company came out with third-quarter earnings on
March 8.  Sales boomed 24% over the same quarter last
year. And because of that tremendous top-line growth, it
reversed a loss (in Q3 2005) into a 3-cent-per-share gain in
Q3 2006. And with several recent product launches, I
expect a lot more growth to come. Here's a look at some of
its recent successes…

Smith & Wesson won its fourth order in the last nine
months for its Sigma 9VE pistols to be sold to the federal
government for use in Afghanistan. That was a $15 million
order (most of which will be realized in FY 2007). Since
last December, the company received orders from eight
domestic and one international law enforcement agencies
for its M&P polymer pistols. And in February of this year,
Smith & Wesson unveiled its M&P tactical rifles at a trade
show in Nevada. The company has already begun shipping
initial test and evaluation units to agencies around the
country.

With all of these catalysts for growth, the company said it
expects sales to grow 20% in 2006 and another 20% in
2007. All of this good news has company insiders opening
their own wallets to get in on the action.

Smith & Wesson: Insider Buying

Since last December, insiders (including the CEO, a vice
president and several directors) have bought 145,000 shares
at prices ranging from $3.62-6.12. Take a look:

Notice that the insiders have been buying shares of SWB at
higher prices for the past several months.  It means the
folks who run the business have confidence in the long-
term outlook of their own stock. Also, you can clearly see
the classic pattern of "cluster buying" with these SWB
purchases. This is where two or more insiders buy stock in
their own company at nearly the same time. In this case, the
company's CEO, vice president and several directors have
all bought in a very small window of time.

The most recent insider acquisition was made on March 29
at $6.12 – near today's prices.

Despite all the buying activity, I can't ignore the two major
sells by Colton Melby, a company director. But while they
are large, I don't consider them important since they merely
continue a pattern of selling by this one individual. He is
likely selling to diversify his own portfolio. We know this
because a) he has been selling at all price points, low and
high, and b) the cluster buying and fundamental outlook are
factors that trump selling by one individual. (Plus, the stock
has risen nicely after each of his sells.)

Since the initial insider buying started last December,
shares of SWB are up 54%.

At the end of the day, Smith and Wesson is exactly the kind
of company you want to have in your portfolio. It has a
major foothold in an established market. It has nailed down
millions in contracts – which have yet to be realized. And
in the last four months the company insiders have spent
over $500,000 to own this stock for themselves.

I wouldn't be surprised to see this under $7 stock hit $10
(or higher) before the end of 2007. Stay tuned…

[Joel's Note: It is usually true that actions speak louder than
words…and when people are acting with their own money,
you can be relatively certain they are going to be doing
what they believe is prudent and profitable. The Small Cap
Insider is in the final stages of production as I type this
note. We will be sure to let you know the moment this
service is available and, hopefully, we can coax Mr. Boric
back for another insightful column before then.

Cheers,

jOEL

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