Be like Buffett: Don't Be Reactive

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

Because of the Sandy Hook Elementary school shootings, a renewed call from people on Main Street to those on Capitol Hill has come for increased gun control.

Don't think any of this has gotten past those on the Street. In fact, if you own shares of companies like Smith & Wesson Holding Company (NASDAQ: SWHC) or Sturm, Ruger & Company (NYSE: RGR), you know all too well how those shares have recently taken a dive.

But if there's ever a time to tap your inner Warren Buffett, now could be your chance.

Buffett's famous, "Be fearful when others are greedy and greedy when others are fearful" motto could certainly be of interest to shrewd investors checking out the aforementioned gun companies.

But is it a good idea to go after such an investment when shares have trended downward? And how have other companies weathered the storm when stacked against adverse events?

Let's take a closer look at two of them.

In December 2009, Toyota Motor Corporation (NYSE: TM) began to announce two different recalls for its cars because of problems either relating to a sticking gas pedal, or the gas pedal being caught underneath the floor mat.

Because the company had to recall millions of vehicles to correct the problem, investors hammered the stock. The second recall took place on Jan. 21, 2010. Less than a month later, the stock dropped to $74.

But if you took the contrarian view and bought into Toyota at that time, you would be rewarded with shares now trading right at $90 a share.

Another example can be gleaned from the BP (NYSE: BP) oil disaster. After the April 20, 2010 Deepwater Horizon spill in the Gulf of Mexico, oil continued to escape for nearly three months. In June of that year, BP's share price sank into the $27 range. But fast forward to today and the shares are in the low-$40s.

Smith & Wesson shares have taken about a 15 percent hit since the Dec. 14 shootings; Sturm Ruger shares have slid about 10 percent. Both companies are directly involved in designing, producing and selling firearms not only to law enforcement agencies, but also to the general public. 

So why are investors scared? It comes down to one word.

Uncertainty.

As it stands, some Capitol Hill politicians want changes on how easy it is to purchase certain kinds of guns. Even President Barack Obama recently said that Vice President Joe Biden will head up a task force on finding ways to decrease gun-related violence.

It's one thing when negative perception blankets your company. It's another when it could take a bite out of your bottom line. Neither Smith & Wesson nor Sturm, Ruger can afford a cut in sales. With analysts calling for 1-year price-target estimates of $13.33 and $50, respectively, both companies have an uphill climb to appease their investors.

But Smith & Wesson and Sturm, Ruger execs should take heart. All they have to do is remember those companies who have been down similar roads -- and who've come out just fine.

Which is why now could be a prime time to buy and hold both companies. It's the tactic that's served Warren Buffett well, and one that prospective buyers would be wise take advantage of.

 

 


Motley Fool blogger Dan Fields does not own shares of SWHC, RGR or TM, but does own long shares of BP. 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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