Gun stocks like Sturm, Ruger & Company (RGR) and Smith & Wesson Holding Corp (SWHC) are set to have yet another huge year of gains, but investors need to be mindful that at some point, these companies will be coming up against pretty tough comparisons.
That’s to say, the insane growth in sales of firearms can’t last forever.
Sure, acts of terrorism and fears of federal action on gun sales are powerful propellants for revenue growth at RGR and SWHC, but there’s no such thing as infinite demand for discretionary goods. There are only so many people with so much money in the world.
More immediately, however, it’s hard to argue against gun stocks such as RGR and SWHC as tactical investments — provided you’re comfortable with any moral implications of such ownership.
Gun stocks suffered a steep selloff over the course of 2014, but the longer term trend — going back a half-decade at least — is one of outsized growth. Indeed, RGR and SWHC have been crushing the S&P 500 for years.
There’s no secret as to why. Terrorism, mass shootings and public unrest are more than enough to boost demand for guns and guns stocks. A president committed to curbing gun violence puts sales over the top, as paranoid gun buyers fret the federal government is going to take their guns away — or something.
Gun Stocks Rally to Start the Year
Witness the double-digit percent spikes in RGR and SWHC the last two sessions because of the president’s forthcoming executive action. As the New York Times reports:
“More guns were sold in December than almost any other month in nearly two decades, continuing a pattern of spikes in sales after terrorist attacks and calls for stricter gun-buying laws, according to federal data released on Monday … ‘President Obama has actually been the best salesman for firearms,’ Brian W. Ruttenbur, an analyst with BB&T Capital Markets, a financial services firm, said last month.”
Given that political backdrop, it would seem that gun stocks like RGR and SWHC would be slam dunks. Heck, SWHC even raised its guidance Tuesday on better-than-expected sales.
That doesn’t mean, however, that RGR and SWHC offer any kind of a smooth ride. RGR lost about 50% in 2014. SWHC tumbled roughly 30%. And — interestingly — these gun stocks are inversely correlated with the broader market. That means they tend to fall when stocks are going up.
Nevertheless, gun stocks look set for more upside this year, if only because the president’s executive action will be especially disturbing to paranoiacs. Besides, it’s a regrettably safe bet that gun stocks will have other tragic catalysts on a depressingly regular basis.
At some point gun stocks will top out, as they did at the end of 2013. Trades unwind. The law of large numbers ensures slowing growth.
But it’s hard to bet against them in the nearer term.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
