A trader’s guide to the firearms sector

February 15, 2016 10:30 AM

On Jan. 12, President Barack Obama presented his final State of the Union Address. 

After seven years in office, Obama has said his final 12 months would feature efforts to curb gun violence. As he outlined his recent executive actions, an empty chair sat in the Congressional balcony – a symbol and reminder of Americans who have lost their lives to gun violence.  

A week prior, his Administration released a list of executive orders aimed at curbing gun violence, including the expansion of background checks for would-be arms buyers and sellers.

In any other industry where regulations may limit access to a consumer good, that sector’s manufacturing stocks would likely suffer a decline. But the gun sector is unlike any other.

The day of the President’s announcement, executives at Smith & Wesson (SWHC) – citing surprise consumer demand in December 2015 – released a revised sales outlook and strong forward guidance that pushed SWHC stock to a new record. 

The stocks of two other publicly traded arms firms, Vista Outdoor Inc. (VSTO) and Sturm, Ruger & Co. (RGR) also surged. 

In the gun and ammunition industry, bad news and regulatory threats are positive for investors. Calls for increased gun control measures drive Americans to purchase weapons on concerns the Federal government may limit Second Amendment rights. Terrorism and high-profile mass shootings also influence gun purchases as Americans worry about personal safety.

In December, the United States faced all three factors when a radicalized married couple murdered 16 people in San Bernardino, California. Following the terrorist attack that employed AR-15s and semi-automatic pistols, President Obama, Democratic leaders, and gun-control advocates called for reforms to limit weapons access for those who mean to do harm to themselves and others. 

Gun-rights groups foresaw this position as a direct attack on the Second Amendment, while consumers flocked to gun shops to stock up on arms. 

It is difficult to find a historical comparison on the politics and economics of a consumer good. In no other industry today has the simple threat of slight – even ineffective – regulatory efforts fueled a run on a consumer good and benefited manufacturers’ stock prices as a result. 

This month, Modern Trader explores the past, present and future of this unusual investment cycle for publicly traded gun manufacturers and the changing fundamentals.

While politics dominate the industry, the last 10 years have seen a major change in demographics and consumer sentiment in the arms sector. An increase in female customers, the liberalization of concealed-carry laws, and the increasing popularity of recreational gun activities have heightened demand and outlook for the sector. We check in with BB&T analyst Brian Ruttenbur, who recently upgraded Smith & Wesson’s stock in early January on the heels of a five-year appreciation of 41.07% (page 24).

We also visit with Wedbush analyst James Hardiman who surprised Wall Street by downgrading Smith and Wesson  to “Neutral” in the wake of the company’s forward guidance statement (page 22).  

We also explore unconventional threats to the industry including the growing boycotts, divestiture and sanctions (BDS) movement to press investors – both public and private – to sell their stakes in gun manufacturers (page 26). Meanwhile, the President’s executive action on smart gun technology has generated both optimism and backlash. Is smart gun technology an industry threat or an investment opportunity ripe for big gains as companies seek to disrupt this multi-billion dollar industry (page 31)?

Modern Trader also talks with  Tom Diaz – a retired lawyer, former journalist, and author who has been at the center of the gun control debate for 30 years – who carves through the hyperbolic warnings about government overreach and offers an evidence-based message that should be shared with every advocate in America: The U.S. government isn’t coming for your guns. He explains why (page 28). And finally, Senator and presidential candidate Rand Paul (R-Ky.) offers his take on President Obama’s executive action (page 32). 

While 2016 may be the year of the gun from a political perspective, this year also presents investors with a number of decisions to make before considering this outperforming sector. 

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About the Author

Garrett Baldwin is the Managing Editor of the Alpha Pages and the Features Editor of Modern Trader. An author and Baltimore native, he earned a BS in journalism from the Medill School at Northwestern University, an MA in Economic Policy (Security Studies) from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University.