Should You Own Gun Stocks?

When the political rhetoric calms down, gun stocks will have good upside.

   

The national conversation about guns continues, six weeks after Sandy Hook. With President Obama’s executive orders regarding firearms, and the nation divided over the issue of gun control, investors may be wondering what to do about gun and ammo stocks.

News reports indicate that gun sales are positively skyrocketing.  Connecticut reports a jump in gun sales since the massacre, as do Kentucky, Florida and Ohio. The Washington Post reports that background checks for guns have increased 38%. In Virginia, sales were up 35% YOY.  A Benzinga story reported that 70% of Michigan firearm sellers reported a sharp increase in sales, and 41% said they were having trouble re-stocking due to demand.

Everyone is rushing to buy what they can now, apparently fearful that the government will remove some of these items from the market.  NRA membership grew by 250,000 in just one month.  Indeed, while it seems like many people are calling for stricter gun control, the masses appear to be voting with their feet, and their dollars.

So let’s look at the short, medium, and long-term strategies for the stocks in play: Sturm Ruger & Co (NYSE:RGR) and Smith & Wesson (NASDAQ:SWHC).

In the short term, the first concern is examining Obama’s executive orders and assessing what they may do to gun sales.  If you scroll down the list, there’s really no cause for alarm, with a minor exception for Order 14: “Issue a Presidential Memorandum directing the Centers for Disease Control to research the causes and prevention of gun violence.”  In theory, the CDC’s report might provide fodder for the kind of gun control that would limit the actual purchase of firearms to a broad range of people. None of the other orders, however, would seem to have any material effect on sales.

With that concern out of the way, it stands to reason given the rush on weaponry we’re seeing that all of these companies are likely to benefit in their next quarterly report.  The firearms stocks in particular are likely to see big boosts in revenue. I believe both stocks are good near-term trades.  The move here is to buy either of the firearm stocks with a stop-loss, or sell naked puts against Sturm Ruger.  The premiums are very attractive even in the near-term expirations, thanks to the volatility.

The medium term is where it gets interesting.  Investors have to remember that right now, the gun control issue is all about political posturing.  A crisis is always a perfect time for politicians to show how “proactive” they are.  That can create uncertainty in the market, and we see it with the rush to buy guns.  People are uncertain whether they will be able to, so sales go up and the stocks go along with it.  Soon, another brand of uncertainty will begin — will the government so badly restrict the gun industry that the market thinks the stocks will suffer?  Politicians will continue their rhetoric, which will create uncertainty … which  would cause me expect to see the gun maker stocks fall.  If you’re quick, you might be able to grab a quick short swing trade.

Over the long term, I expect we will end up where America usually ends up: compromising.  The Democrats will want strict gun control.  The Republicans will realize they have to appear responsive, and the NRA will lobby them to keep restrictions “reasonable.”  Some kind of modestly restrictive legislation will pass.  The most restrictive of Obama’s executive orders will get challenged in court.  Some will stand, others won’t.  Another president will come along and rescind those orders.

So in the end, little will change.  There will be some modest restrictions, but nothing that will terribly upend the gun makers.  They’ll make new products.  They’ll diversify a bit.  They’ll grow.

Most of all, they’ll continue to see additional demand from folks who will always be concerned about the threat to their right to own a gun.

So for now, I’d tell aggressive traders to get involved, but conservative investors should sit on the sidelines for about six months.

Lawrence Meyers has sold February naked puts against Sturm Ruger.


Article printed from InvestorPlace Media, http://investorplace.com/2013/01/should-you-own-gun-stocks/.

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