Removing Ammo Inc (POWW) From the BUY LIST

Gone but Not Forgotten

StockTips

Jul 1

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Nothing made sense! And when shit doesn’t make sense I start looking for answers. And when I’m looking for answers, I first look for anomalies. I then attempt to fill those anomalies, based on my understanding of the underlying conditions, with the most plausible explanation. Here are my findings.

Unlike previous quarters, we never received an update halfway through this quarter. Ammo Inc is famous for doing this, but they DID NOT do it this quarter. Why? Well, we found out that this quarter, by comparison, underperformed. It is not required to provide the shareholders with inter-quarterly earnings. But they never failed us before. One can only assess that they didn’t do this because, 1. they didn’t want to assess weaker than expected earnings. 2. they could not reasonably assess expected earnings due to the effect of hiring more workers among other considerations.
How did this quarter underperform every other quarter? Observe that they claimed record margins (at least annually), record revenues (they certainly did score record revenues this quarter), a record take rate from gunbroker, & they also claimed they were sold out for this quarter. So how in Gods name did they underperform as compared to the other quarters!!?? (Likely because of all the new employees they’re hiring to move into the new facility & the 1m rounds they gave to the Ukraine).
They DID NOT give us a rough estimate of the expectant EPS next quarter, despite doing this in quarters past, & DISPITE THE FACT THAT NEXT QUARTER ENDED ONE DAY AFTER THEY PUBLISHED LAST QUARTERS EARNINGS! That’s a red flag folks! As we have seen, or as they have demonstrated rather, they may be hesitant to give EPS projections if they expect the quarter to underperform.
In past quarters they usually gave us some insight as to their backlog orders. They DID NOT do so this quarter. Why? Another red flag! Likely because with the new facility they truly do not know their current output capacity until things are underway.
They also hired an ad firm last quarter. They spoke nothing about it during earnings to my knowledge. But it’s only natural with the expanded production capability they will need to advertise to get additional business.
Why in Gods name didn’t they give us quarterly EPS!!?? Many companies do, even when reporting the annual 10-K. Certainly they did a year ago. Why change now!!?? Such a decision would have to be made between the CEO & CFO. That’s not looking after your shareholders! When you make your shareholders dig through your financial reports & history to figure out how you performed for the quarter in earnings, there is a chance they’re trying to bury quarterly earnings under their superb annual earnings. And quarterly earnings are IMPORTANT!! You not only want to compare them year over year, but also quarter over quarter … just like any of the macro data I include on the calendar above … & for more reasons that I can list here!

So here is my theory. The number one cost of any firm is labor. They needed to hire additional workers & train them for the new facility. That cost them a great deal of money. This explains the low EPS for the quarter. There may be other factors, but this is likely the largest contributor. I don’t think this issue will be resolved when next quarter is reported in roughly 30 trading days or so. Else they would have announced, as they usually do, a projection for the following quarter. The ad firm was to help them generate business … because when they expand operations with the new facility, they will be capable of producing a lot more in a shorter amount of time. With such increased scale, they will need more orders to fill.

In the near term I’m predicting continuation of lower than historic latter pandemic era earnings ... at least for the next two reporting periods (quarters). A full quarter of new facility earnings WILL NOT be reported until February 2023. (Q1 APR-JUN No facility, Q2 JULY-SEP Partial facility, Q3 OCT-DEC Full facility… Q3 Reported in February). That’s 8 months out!!! By the time they’re up & running with the new facility for a full quarter, who knows what the ammo market will look like? I can’t project that far out. I think it’s bullish, but I can’t project 6 months out on specialty discretionary retail amid a likely recession after 2x quarters where people & businesses stocked up on ammo ... which may come out of future sales. There are bullish factors … the Supreme Court did just expand open carry by 30% of the US … so Ammo Inc has that going for them. And while I can’t predict their ability to gain & acquire future government contracts, I’m somewhat certain they will. And recessions are often bullish for self defense. And who knows what the heck President Biden is going to attempt to do with respect to guns & ammo? So there are plenty of reasons to remain bullish despite this assessment.

Nevertheless, I think there is time to step away from this stock for a bit. I see at least 6-8 months of sideways trading here (I could always be wrong folks!). Sure, I could continue to sell calls as I have been, letting them expire worthless for some options income, but I’ve taken my licks on this stock. When companies abruptly change from behaviors they’ve had for the last year, that’s when I sit up & take notice. COMPANIES DO NOT CHANGE BEHAVIOR FOR NO REASON! And whenever you see them change behavior, ensure you make an attempt to figure out why!

Now, I could have left this on the BUY LIST longer … tying up capital …. for another 8 months or so. But that would be unethical, as I myself have closed out this position ( announced on twitter.) What kind of integrity would I have if I sold the position but kept it on the buy list? I promised that I would never put anything on the BUY LIST that I would not throw my own money at. How then could I leave it up? I simply cannot.

All this said, I like the company, I like the stock! There is ample opportunity to sell covered calls until the cows come home! So don’t take this as me bashing the stock. I have a feeling we have not heard the last of Ammo Inc here at StockTips! But for now, I will remove it & add the slaughter to the StockTips record. This one is going to hurt!

Good news is now I have to burn brain cells attempting to find something to replace it with amid a bear market & likely recession. And I have a three day weekend to do it! … though market conditions are really really rough for both long & short plays right now. I’m going to TUCK POWW AWAY for later.

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