Will These Gun Stocks Still be Short-squeezed?

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For quite some time, I believed that Sturm, Ruger & Co. (NYSE: RGR) was ready to be short-squeezed. After the tragic shooting incident in Newtown, Connecticut, this percentage has climbed up to 49%. On one side, the legislators seem ready to enact the weapon assault ban. However, on the other hand, it also seems that influential bodies like National Rifle Association (NRA) will try to reach middle grounds with the State to enforce only limited restrictions on the firearm business so that the gun makers and retailers do not suffer a lot. In this scenario, only one question arises: Can RGR still be short-squeezed?

The Anti-firearm Sentiments

The first and foremost opponent of relaxed gun laws is President Obama himself. Time and again, Mr. Obama has shown hostility towards slack gun laws. This is the reason why the firearm enthusiasts rushed to the stores to buy guns when the President was re-elected. They feared that Mr. Obama would tighten the gun laws. Three mass killings occurred during Obama’s previous tenure:

1)  The shooting in Tucson, Arizona

2)  The Fort Hood shooting

3)  The shooting in Aurora, Colorado

After this shooting incident, Mr. Obama gave a speech on gun control this Sunday. An article stated the following:

“After each of the three other mass killings during his tenure, Obama has renewed calls for legislation without exerting much political capital, but the definitive language on Sunday may make it harder for him not to act this time."

Therefore, this time around, I believe that it is hardly unlikely that gun laws will remain liberal any more.

Last Friday’s shooting incident has also triggered a nation-wide wave of revulsion. Many big names are displaying their disgust for firearms in different ways. Wal-mart has deleted the name of the semi-automatic Bushmaster rifle from its web listing. The same Bushmaster rifle was used in the tragic school shooting incident. Dick’s Sporting Goods, another gun retailer, has temporarily suspended the sale of military-style guns.

Even investment firms are divesting their interests in the firearm companies. Cerberus Capital Management LP has recently announced that it is planning to sell Freedom Group, the largest U.S. gun maker. Freedom Group is the maker of the Bushmaster rifle that was used in the incident.

Even some people belonging to the pro-gun lobby are calling for a change in the current U.S. gun laws. Examples include, Senator Joe Manchin, Nick Rahall, the U.S. Representative for West Virginia and Senator Mark Warner.

The Role of the NRA

The NRA will play an important role in deciding the future of the gun industry in the U.S. It remains unclear how aggressively the Democrats or the Republicans will push for new firearms restrictions. However, after the tragic incident, many gun owning Americans and members of the NRA are backing sensible gun regulation.

A list of five safety gun regulations was shortlisted after being voted in majority by the NRA members and the non-NRA gun-owners:

1)  Requiring criminal background checks on gun owners and gun shop employees.

2)  Prohibiting terrorist watch list members from acquiring guns.

3)  Mandating that the gun-owners tell the police when their gun is stolen.

4)   The concealed carry permits should only be restricted to individuals who have completed  a safety training course and are 21 and older. 

5)   The concealed carry permits shouldn’t be given to perpetrators of violent misdemeanors or individuals arrested for domestic violence. 

However, the NRA has not yet issued a public statement about the school shooting. The bulls believe that the NRA is an influential society that enjoys ‘special relationships’ with the decision-makers in the country. Therefore, the repercussions of the shooting incident may not be that severe for the firearm industry as expected.

My take

I believe that this event might bring a total turnaround in the industry. There is no doubt that the company has solid backlogs. But for how long will they last? The bulls normally used to cite the following reasons for the success of Ruger and the overall industry:

1)   Recent new product innovations

2)   More liberalized concealed-carry laws throughout the U.S.

3)   Increased social acceptance of firearms

However, this incident has affected the validity of these options. There is hardly any chance that the gun laws will remain as relaxed as they are right now. Moreover, this incident will also negatively impact the social acceptance of guns in society. And of what use are the product innovations if there is no demand for the product or the demand is present, but the law restricts the sale of that product?

Sturm, Ruger pays a dividend yield of 3.19%. Currently, 49% of the total float has been shorted. The shooting incident is likely to shake up the firearm industry dynamics in the long-run. I believe that the glory days are now over for the gun industry, especially for both Sturm, Ruger and Smith & Wesson Holding Corp. (NASDAQ: SWHC). Both stocks are up 30% and 91% on a YTD basis. The Wedbush analyst believes that a ban similar to that imposed in 1994 on the semi-automatic military-style weapons would have a noticeable impact on both RGR and SWHC.

If gun laws tighten, these stocks could take a dive. Though the question investors need to ask themselves is what the long term implications will be.

AnalystX has no positions in the stocks mentioned above. The Motley Fool owns shares of Sturm, Ruger & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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