California may have been targeted by draconian anti-gun legislation, but it has been publicly traded gun stocks that have felt the heat. Earlier this summer, the “Golden State” introduced an unprecedented wave of firearms and ammunition restrictions. Although fiercely contested by Republicans, public sentiment towards recent terrorist attacks helped enact the bills. As a result, California shooters will soon be prohibited from owning high-capacity magazines or purchasing more than one long gun per month-long period. However, the biggest issue is the sales ban on semi-automatic rifles with detachable magazines.
Prior to the sweeping legislation, Californians could purchase AR-15 or AK-47 stylized rifles that had “bullet buttons” — devices that prevent manual magazine releases. Assembly Bill 1664 attacks this loophole by banning the sales of such firearms. The major beef is that the bullet button had previously prevented detachable magazine semi-auto rifles from being classified as “assault weapons.” With the passage of AB 1664, California shooters are forced to either render these rifles “featureless” — ie. stripping them of banned features — or register them as assault weapons.
By doing the latter, gun owners have their right of usage to the firearm in question severely restricted under Penal Code section 12285. This seemingly puts California shooters in a tough bind, and gun stocks in a major revenue predicament. According to FBI data, California long gun sales in November represented a whopping 11% of the national aggregate. A big chunk of those sales are now kissed goodbye, which explains the massive slump recently in gun stocks.
But firearm retailers and Second Amendment advocates are not sitting back. For instance, Atlantic Firearms, a Maryland-based dealer, will continue to supply semiautomatic rifles under a featureless platform. In addition, a company called AR Maglock invented a device that allows California AR-15 owners to keep the features in their rifles intact, while avoiding the dreaded “assault weapons” legal stigma. Not only are these creative solutions to asinine laws — terrorists and criminals are not worried about compliance — they potentially keep alive a substantial cash-flow source for gun stocks.
What was designed to permanently derail the firearm industry in California may have instead backfired. With so many gun owners in the Golden State, “compliance accessories” is a potentially lucrative business. And when people wise up to the idea that registration seems alarmingly like the pretext to confiscation, firearm enthusiasts will likely increase demand for featureless rifles.
This should move firearm manufacturers on track again after what looked like an ugly headwind. Here are three gun stocks that will fire back in 2017.
Gun Stocks to Buy: Smith & Wesson (SWHC)
Inarguably, there’s no more iconic company among gun stocks than Smith & Wesson Holding Corp (NASDAQ:SWHC). Say what you want about other names in the business. SWHC is the originator of the .44 magnum revolver — the gun that made “Dirty Harry” so, well, dirty. Business has been flying in recent years as gun-related violence caused panicked firearm purchases. Fears of the Barack Obama administration clamping down on the Second Amendment ironically has been a boon for gun stocks.
That quickly changed in 2016 when California introduced their restrictive bills.
Click to Enlarge One of the worst consequences of owning a legally recognized assault weapon is that it cannot be sold or transferred. The exception, according to the California Attorney General, is a sale to a gun dealer with a license to handle assault weapons. Needless to say, such dealers are not plentiful. This inevitably limits SWHC and other gun stocks to one-time sales, and no possibility of recurring business.
However, the innovators like AR Maglock are giving SWHC a new lease on life. Rifles are high-margin products compared to handguns. Furthermore, the AR-15s sold by SWHC and rival gun stocks are modifiable. Essentially, they’re “Legos” for adults, and that’s a great platform to promote accessory products at or after the initial sale.
While SWHC has suffered through an ugly cycle this year, gun rights advocates are giving the iconic company a second wind.
Gun Stocks to Buy: Sturm Ruger & Company Inc (RGR)
While it may not have the pop culture notoriety of Smith & Wesson, Sturm Ruger & Company Inc. (NYSE:RGR) is a highly respected name among gun stocks. Like its rival, RGR has, for the most part, surged under the Obama administration.
Of course, that was a major plus for RGR stock, which manufacturers extremely pricey AR-15 rifles, such as the SR-556. The combination, though, of affordable and premium rifles gave the company an enviable advantage.
Click to Enlarge But just like the rest of the industry, RGR has had a rotten 2016. Year-to-date, shares are down 11%. For those who question the thesis of California being the central reason for volatility, consider these facts. In August and September, long gun sales in the Golden State averaged 43,180 units, based on national background check data. In October, that figure jumped 26% to 54,333 long guns. Last month, sales skyrocketed to 82,554 units, or a 52% increase.
Despite being a political blue state, California loves its guns. When those rights are threatened, you can expect massive waves of sales. For RGR to lose that revenue stream would be devastating. Earlier this year, it wasn’t clear if retailers would continue doing business with California. However, with companies like Atlantic Firearms finding novel ways to get around silly legal restrictions, RGR has been gifted a second chance.
Thanks to the current political environment, I expect Ruger to make the most of their newfound opportunity.
Gun Stocks to Buy: Vista Outdoor Inc.
For the most part, sports and recreation products manufacturer Vista Outdoor Inc. (NYSE:VSTO) isn’t a household name. However, firearm enthusiasts would immediately recognize many of the brands under VSTO, including Blackhawk, Bushnell and Savage Arms. What really kept VSTO viable among gun stocks is its wealth of ammunition brands, such as American Eagle and Blazer. After all, what good is a gun if you have no ammo with which to shoot?
That simple concept came under direct fire in the sweeping California legislation.
Click to Enlarge During the 2016 election, the state passed Proposition 63, which will introduce unprecedented restrictions on ammo sales. The gist of the new measures treats ammo transactions in a similar fashion to firearms. This requires licensed dealers, background checks and intrusive limitations towards online ammo purchases. That’s a major drag on VSTO, where ammo contributes a significant amount to the top and bottom line.
Nevertheless, I’m encouraged by the response of the broader firearms community. Although it’s a significant pain, retailers and small businesses are finding ways to work out around the legislations. Ultimately, this is a net positive for suppliers and consumers. As a result, this should translate to higher ammo sales for VSTO. Additionally, its Savage Arms unit exclusively sells bolt-action rifles, which are in zero danger of being restricted. VSTO could potentially improve revenue here by producing more “military-style” bolt-action rifles.
Guns and ammo go hand-in-hand, which is why VSTO could be among the gun stocks seeing a surge in 2017.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.