Gun Stocks’ Fate in the Wake of Sandy Hook

by Jim Woods | December 18, 2012 8:38 am

So much tragedy. So much pain. So much suffering.

As I wrote the above words, I did so with tears in my eyes and an emotional spear in my heart of the sort that has only appeared, fortunately, on the rarest of occasions. The genesis of this sorrow is last Friday’s horrific murders of 26 people — 20 of whom were children ages 6 and 7 — at the Sandy Hook Elementary School in Newtown, Conn.

The shocking brutality and violence perpetrated on this community has rightfully caused the nation to ponder the situation deeply, and to ask why this happened, and what we can do to try to prevent this type of event from ever happening again.

Answering “the why” will require a lot more investigation regarding the circumstances of the perpetrator. Unfortunately, given that the murderer killed himself, it’s unlikely we will ever find out why this particular act of violence took place.

As for the steps toward prevention, the Sandy Hook murders have brought out a renewed push to control and regulate the kinds of weapons used in the commission of this horrible act.

The prospect — and in my opinion the likelihood — of stricter gun laws, particularly on so-called assault weapons, is likely to have negative ramifications for several publicly traded companies in the firearms and related space.

On Monday, we saw a 5.2% selloff in shares of firearms maker Smith & Wesson Holding Corp. (NASDAQ:SWHC[1]). That decline was on top of the 4.1% drop in Friday trade, for a 9.3% drop in the value of SWHC shares since last Friday’s killings. Fellow firearm maker Sturm, Ruger & Co.’s (NYSE:RGR[2]) shares also have plunged over the past two trading sessions, with a combined decline of 7.8%.

Even shares of firearms, ammunition and outdoorsman products retailer Cabelas (NYSE:CAB[3]) were hit by heavy selling. Those shares suffered a two-day decline of 7.3%.

The selling in the space is undoubtedly a direct consequence of the growing chorus of public officials calling for stricter gun laws in the wake of the Sandy Hook tragedy.

Over the weekend, President Barack Obama was careful not to jump right out and say that we needed stricter firearms laws. Rather, the president used terms such as using “whatever power” he has to help prevent future crimes such as these.

Other politicians weren’t so subtle.

On Sunday, Sen. Diane Feinstein of my home state of California, said she would introduce legislation banning assault weapons on the first day the new Congress convenes in January. Feinstein has long been a supporter of strict federal gun laws. In fact, she sponsored the original ban on assault weapons in 1994 — a ban that expired and was not renewed in 2004.

Now, before we continue, my editors and I thought it important for me disclose my personal opposition to gun laws of this sort. As a weapons expert, former U.S. Army commando and passionate Second Amendment advocate, I regard attempts to curtail the freedom to keep and bear arms a much bigger long-term threat to society than the threat posed by those intent on violating current laws against murder.

That said, I do suspect that the current zeitgeist in the country resulting from the horrific Sandy Hook killings is going to make a ban on the types of rifle used in this incident a reality.

This kind of ban would hurt Smith & Wesson sales, and particularly the renewed emphasis the company has placed on its M&P line of tactical, military-style modern sporting rifles. The M&P rifles closely resemble the Bushmaster semi-automatic rifle that was used in during the Sandy Hook massacre. The Bushmaster is made by Freedom Group, a company owned by private-equity firm Cerberus Capital Management LP. (Though it might not be for long — Cerberus just announced plans to sell off its stake in Freedom Group[4] in the wake of the Sandy Hook shooting.)

Sturm, Ruger likely would be affected less than Smith & Wesson by an assault weapon ban; though the company does offer these types of firearms with its SR-556 line of performance rifles, the company is more known for its personal defense semi-automatic pistols and revolvers.

Cabelas sells all types of weapons, including assault-type rifles and accessories for those weapons such as ammunition, optical sights, targets, and hunting and shooting apparel. However, the diversification of the company’s outdoorsman-type offerings will, I suspect, allow it to more easily absorb the negative revenue ramifications of stricter federal gun laws than either Smith & Wesson or Sturm, Ruger.

The bottom line here for investors — particularly those who have enjoyed a huge run higher in all three of these stocks over the past year, as SWHC is up 134% over the past 52 weeks, RGR is up 40% and CAB is up 79% — is that now could be the right time to think about locking in profits.

The need to “do something” on the part of legislators in the wake of this tragedy is, I feel, too powerful a trend to escape. That might not be good for law-abiding gun owners, or for shareholders of stocks like SWHC, RGR or CAB, but the likely reality of stricter federal firearms laws on the books is something that both gun owners, and investors in these stocks, would be well-advised to prepare for.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Endnotes:
  1. SWHC: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWHC
  2. RGR: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGR
  3. CAB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAB
  4. announced plans to sell off its stake in Freedom Group: http://www.foxnews.com/us/2012/12/18/cerberus-capital-plans-to-sell-stake-in-bushmaster-gun-maker-freedom-group-in/

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