Boom! 5 Ways to Make the “Smokin-Gun” Trade

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

I happen to know many fanatical hunting enthusiasts.  They think guns.  They talk guns.  And they shoot guns, all the time. It runs in their blood.

That’s why, when the presidential election rolls around this November, these hunters are going to vote against President Obama.  Hunters and gun enthusiasts across the United States are terrified that their second amendment right to bear arms will be greatly diminished. 

But how does this correlates to the markets?  Well, if President Obama wins another four-year term, you can expect stores to sell out of guns in a hurry as gun-fans stock up.  In fact, Wal-Mart (NYSE: WMT) and Cabela’s (NYSE: CAB) are already preparing for larger demand.

Wal-Mart is the largest seller of firearms and ammunition in the U.S., and its stores are located in the same rural areas that gun enthusiasts usually live in.  Should President Obama win another term, Wal-Mart’s weapons stockpile could become reduced in a hurry.

Hunting shop Cabela’s pulls in about 20% of its sales from firearms and ammo, and it too is preparing for an onslaught of sales.  To make sure that its stores will not sell out of guns, Cabela’s is offering suppliers payment within 15 days in order to make it a favored vendor, insuring that it will have ample supplies.  For reference, some retailers take up to 120 days to pay suppliers.

The two giant retailers have upside potential, but the real investment plays come from the gun companies themselves.  Here are three companies that could jump on increased gun sales.

Olin (NYSE: OLN)

Olin sells firearms and ammunition through its Winchester brand, including gauges and calibers for shotgun shells.  It also sells cartridges for hunters, law enforcement officials, and U.S. armed forces.  In June the company’s backlog doubled, and because of the huge demand it plans to increase ammunition prices by 2% to 6%. 

Valuation-wise, Olin has a market cap of $1.8 billion and trades at a multiple of 12.5 times earnings.  It also pays a rich 4.2% dividend, an exceptional amount for a company with significant upside. Lastly, the company trades just under $23, near its 52-week high of $23.48.

Smith & Wesson (NASDAQ: SWHC)

Founded in 1852, Smith & Wesson makes general firearms and handguns.  The company’s market is composed of collectors, hunters, sportsmen, competitive shooters, law enforcement agencies, and military agencies, according to Yahoo! Finance.

The company has a market cap of approximately $720 million, which just increased as the stock reached a new 52-week high two weeks ago, breaching the $11 mark.  Also, Smith & Wesson trades at 22.5 times earnings.

Finally, Smith & Wesson recently returned to profitability.  For the fiscal year ending April 29, 2012, the company reported a net profit of $16.1 million, a great jump from the previous year’s $82.8 million loss.

Sturm, Ruger, and Co. (NYSE: RGR)

According to Yahoo! Finance, Ruger “offers single-shot, autoloading, bolt-action, and sporting rifles; shotguns; rim fire autoloading and center fire autoloading pistols; and single-action and double-action revolvers. The company also manufactures and sells accessories and replacement parts for its firearms.”  Besides selling to the commercial market, Ruger sells its goods through distributors to law enforcement agencies and foreign governments.

With a price-to-earnings of 18.3, Ruger still has some upside compared to its industry.  Its 3.1% dividend is not bad, either.  Also, Ruger saw profits of $27.5 million, $28.25 million, and $40 million in each of the past three years, respectively, and Ruger’s 41% growth rate from 2010 to 2011 is impressive.

Conclusion

The FBI reported that through Aug. 31, almost 12 million background checks stemming from gun sales took place.  This number represents a 56% increase from 2008.  Thus, the realization of another four years of President Obama would create a flurry of activity around the gun and ammunition space. 

Gun fanatics would hope to buy up firearms before their second amendment rights could be limited, and demand could be so strong that retailers sell out of their products.  In that case, both gun manufacturers and distributors would see their gun sales go “Boom!”


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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