SAN FRANCISCO (MarketWatch) — It’s an election year and U.S. gun sales are soaring.

For one analyst, this is too much of a good thing for Smith & Wesson Holding Corp. SWHC and fellow gun maker Sturm Ruger & Co. RGR, -1.49% . Both companies were downgraded Wednesday by Scott Hamann at Keybanc Capital Markets. The reason? Valuation.

Smith & Wesson shares have rallied a staggering 210% over the past year. Sturm Ruger shares are up 60%. According to Hamann, the rally has run its course and it’s time to move on.

“Given the significant outperformance of the industry compared to the broader market, coupled with what we believe to be close to peak near-term retail demand trends, we believe further upside in the stocks could be limited and the risk/reward dynamic is no longer compelling,” Hamann wrote in a research note.

KeyBanc subsequently cut its recommendation on Smith & Wesson to hold from buy. The stock fell 10% to $8.72.

Sturm Ruger was cut to underweight from hold and given a price target of $40 a share, $6 below where it’s trading midday Wednesday.

But what’s the story behind these two companies’ exceptional 12-month performance? The knee-jerk response is that gun owners are stocking up on even more firearms, because it’s a presidential election year.

There’s some truth to that. There was a clear spike in gun purchases in late 2008 on widespread fears that president-elect Barack Obama would clamp down on gun ownership after taking office.

He didn’t.

According to gun industry executives, this latest surge in firearm purchases appears to be based on what Smith & Wesson CEO James Debney has called a “much stronger installed user base.”

Translation: There are more gun owners out there and they continue to add to their collections.

Data on background checks from the Federal Bureau of Investigation show a 20% increase in gun sales so far this year.

A gun shop in Wisconsin. Reuters

This upswing has been a huge boon to Smith & Wesson. The company’s fiscal fourth-quarter report, released in late June, showed a 28% jump in revenue to a record $129.8 million from a year earlier.

Sturm Ruger’s second-quarter results, released on Aug. 1, showed a 50% year-over-year jump in sales to $119.6 million. Earlier this year, the Southport, Conn.-based company temporarily stopped taking new orders, saying they simply couldn’t keep up with demand.

KeyBanc analyst Hamann cautions that demand may have peaked, however, prompting today’s downgrades.

“While we believe the recent momentum in the [FBI’s National Instant Criminal Background Checks] has been impressive thus far in 2012 and accelerating since the April slowdown, we believe trends could potentially be near peak levels, particularly as we more closely approach the November presidential election and enter a period of more difficult comparisons,” Hamann wrote.