Background Checks No Match for High-Caliber Gun Stocks

by Jim Woods | April 12, 2013 2:30 pm

The Senate took a step toward increased federal legislation on gun control Thursday, with 68 senators voting to begin debating the main bill (31 opposed). The action removes a procedural roadblock that clears the way for a vote on the final gun control legislation, a tally that will likely occur in a few weeks.

The vote to move to debating the main bill came about after a deal on background checks[1] was struck by two key players, Sen. Joe Manchin, D-W.Va., and Pat Toomey, R-Pa. The deal, along with yesterday’s vote, averts a Republican filibuster from taking place before the main bill reaches the Senate floor.

The latest legislative action on the gun debate still is a long way away from resolution, but one thing I think is nearly certain is that any federal gun control legislation capable of actually getting enough votes to become law won’t slow down the intense muzzle velocity of gun sales.

That’s great news for investors who’ve been betting big on the two publicly traded gun-makers, Smith & Wesson (NASDAQ:SWHC[2]) and Sturm, Ruger (NYSE:RGR[3]).

Even if the most stringent of federal background laws is passed, gun-makers already have dodged the biggest bullet of all — a ban on so-called “assault style” weapons.

Now to be certain, fear of stringent gun control laws in the wake of the Sandy Hook tragedy caused a whole lot of firearms buyers to rush to their local gun shop and gun shows, and load up on as many semi-automatic rifles, shotguns and handguns as they could. Last month, I went into my local gun store in Southern California, and the shelves were basically bare. (No, really.[4])

Recent statistics on gun sales support my anecdotal observation. According to a report from Pipeline Data, firearm background checks exceeded expectations in March, as the firm estimates that more than 2.2 million checks were conducted through the FBI’s National Instant Criminal Background Check System. This incredibly high number of background check requests represents the fourth consecutive month of check requests over 2 million.

The takeaway here is that gun-buyers are still buying despite existing background checks implemented on the state level, so does anyone think a federal background check system will do much to stop demand? I think not, and that’s good news for the high-caliber shares of SWHC and RGR.

Just how good have these stocks been? Well, year-to-date, SWHC is up 6.5% while RGR is up 10.9%. Interestingly, each of these stocks has pulled back over the past four weeks, as investors lightened up their holding in the face of Congressional headwinds. Now, however, it looks like those headwinds will be a mild breeze at best, and that augurs well for the future of gun stocks.

If federal background checks do get through Congress, that’s about all the teeth any new gun legislation is going to have.

For investors in gun stocks, that’s a gentle bite that these stocks can easily pass right through.

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

  1. a deal on background checks:
  2. SWHC:
  3. RGR:
  4. No, really.:

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