Time for Contrarians to Consider Gun Stocks

Andrew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sturm, Ruger & Co.'s (NYSE: RGR) stock has had a very up and down year. Twice it has reached highs of close to $60 before falling back down to the $40, before it bounced back slightly. The recent movement downward is being linked to the tragic events in Newtown, Connecticut.

That being said, as an investor one must separate current events from the long term investment picture. 

For example, headlines in the media recently from various parts of the country have highlighted record weapons sales. Wal-Mart is selling out of guns. This trend has been observed after past high profile incidents. Currently, there are news headlines about the Mayan End of the world. One must focus on the long term perspective.

Ruger recently paid a substantial special dividend of $4.50/share. With the recent pullback in share price, their standard dividend yield is 3.4%. 

Earlier in the year, Ruger had to stop taking orders for about a month due to overwhelming demand. The company is growing and there are plenty of people who want to buy Ruger's guns.

At the moment, the current conversation is about gun control. That is arguably the best time to invest in a gun stock if you are so inclined. Those who invested in Phillip Morris during the 80s and 90s when there were some high profile trials ended up seeing excellent returns on their investments.

Smith & Wesson Holding Corporation (NASDAQ: SWHC) is another stock to consider in the space. Unfortunately, unlike Ruger, the company pays no dividend. However, the company currently trades at a reasonable P/E of 9 and could be paired together with an investment in Ruger for a more diversified investment in gun equities.

I anticipate that Ruger will start its return to the $50 level in January; when talks of the fiscal cliff have returned to dominating the headlines and Ruger is no longer the focus of the international community.

In fact, panic about gun control has normally been an excellent catalyst for gun stocks like Ruger. In 2008 when there was panic about the Obama administration gun sales took off which started a trend of 4 consecutive years of significant growth for Ruger

As horrible as the shootings in Connecticut were, the only meaningful legislation being discussed is an assault weapons ban. The worst case scenario for people on the pro-gun side that has a plausible chance of happening in the near future is a renewal of the assault weapon ban. As noted in an article on Seeking Alpha, Smith & Wesson's potential revenue loss from an assault weapons ban could be approximately 19%; Ruger's exposure is significantly less.

Given the previous pattern of guns in the headlines driving sales, Ruger could perhaps expect to see a significant jump in sales of the guns it sells that are still legal if any kind of assault weapons ban happens. This would actually be good for the company's share price.

Given everything I have noted about the company in this blog post, I feel comfortable recommending both Smith and Wesson and Ruger as potential invesntments, though I favor Ruger.

AndrewCherna has a long position in Sturm, Ruger. 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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