More than three years have passed since the last official stock market correction (entailing a pullback of at least 10%). But deep selloffs have intermittently struck in just about every corner of the market, sometimes producing phenomenal buying opportunities.

One of the best: iconic firearms maker Smith & Wesson Holding Corp. (Nasdaq: SWHC).

Smith & Wesson was a casualty of the “gun bubble” that popped almost a year ago, triggering a selloff in gun-industry stocks that nearly halved the company’s market value.

While asset bubbles are often a function of euphoria, fear was the initial positive catalyst in this case. Many feared that the Obama administration would make firearms harder to obtain, which supported rapid growth of gun sales and massive gains for firearm stocks in recent years.

At Smith & Wesson, sales more than doubled to a record $627 million in fiscal (April) 2014 from $237 million in 2007 (the year before Obama took office). Between his January 2009 inauguration and May 2014, the firm’s stock rose more than sixfold.

But gun demand finally crashed, sinking Smith & Wesson’s sales, profits and stock price along with it. However, the company is in the midst of an impressive turnaround in which shares have since risen more than 60% from post-bubble depths.

Although the swiftness of the recovery might suggest a renewed gun bubble, that’s probably not the case. With Obama’s time in office winding down, there isn’t the element of fear that existed when his presidency began. More likely, we’re seeing the start of a more sustainable long-term uptrend, based mainly on improving industry fundamentals.

Consider Smith & Wesson’s fiscal third-quarter earnings of $0.15 a share, reported in March, which exceeded consensus estimates by 50%. Quarterly revenue of $131 million, though nearly an 11% year-over-year decline, also topped expectations. Plus, management recently bumped fiscal fourth-quarter sales guidance up by 8% to $175-to-$179 million, which also bodes well for quarterly profits.

These developments are in part a reflection of a normalizing post-bubble firearms market. After slashing orders in response to plummeting consumer demand, distributors are finally working through excess inventory they held at the height of the bubble. With those supplies dwindling, they’re looking to rebuild inventory.

There are a couple of other signs that long-term demand will be generally robust, including projections for the legal small-arms market to grow nearly 30% to $5.3 billion by 2020. Legal small arms include pistols, rifles, machine guns and carbines, which are designed for activities such as hunting and sport shooting.

Activity levels in the FBI’s National Instant Criminal Background Check System (NICS) also give a sense of where gun demand is headed. The NICS shows more than two million firearm background checks in March, up from about 1.9 million in February and 1.8 million in January. March was just the tenth time in the NICS’s 17-year history that monthly firearm background checks surpassed two million.

Smith & Wesson is well prepared for the industry rebound, thanks to management’s willingness to continue expanding despite recent turmoil within the industry. Indeed, the firm proceeded with a key $130-million acquisition last November, just as its stock was hitting gun-bubble lows.

The acquired company, gun accessories manufacturer Battenfeld Technologies, Inc., complements Smith & Wesson’s core firearms business with eight brands of gun maintenance and supply products. Management expects Battenfeld to boost revenue by $55 million in fiscal (April) 2016.

#-ad_banner-#As one of the top three U.S. firearm makers, Smith & Wesson should also benefit from fast-rising rates of gun ownership among women. Recent surveys by the National Shooting Sports Foundation suggest nearly a quarter of current gun owners in the United States are women, compared with 13% in 2005. And last year, about three-quarters of first-time buyers were female, according to the Foundation.

These customers were typically seeking semiautomatic pistols — one of Smith & Wesson’s best-selling categories — for self-defense and/or shooting sports, such as hunting or target shooting. These firearms purchases averaged about $700.

Analysts see Smith & Wesson increasing earnings 14% annually during the next five years, a feasible expansion rate implying as much as 95% upside for the firm’s stock at the current earnings multiple  of 16. However, growth estimates could be revised dramatically upward if a recent joint venture with defense industry giant General Dynamics Corp. (NYSE: GD) pans out.

Together, the two companies are preparing to compete for a U.S. Army handgun contract worth an estimated $500 million — nearly as much as Smith & Wesson’s projected fiscal 2015 revenue of $546 million. The Army, which recently decided it would no longer use its current handgun supplier, Beretta, should be issuing a formal request for proposals any time now. A winner will likely be selected sometime in 2017, analysts say.

Risks To Consider: The gun bubble may have come and gone, but Smith & Wesson shareholders shouldn’t expect smooth sailing in the years ahead. The firearms industry has always been highly cyclical, so gun stocks are bound to suffer bouts of extreme volatility.

Action To Take –> The possibility of a major deal with the Army is enticing and could help propel Smith & Wesson to the top of the firearms industry. But even without the Army as a customer, rebounding Smith & Wesson is an attractive investment. Profit growth should be solid in coming years as the firearms industry replenishes depleted distribution channels and the ranks of female gun owners continue to rise. With a forward price-to-earnings ratio of 14, the stock is still a very good value despite recent gains.

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