Gun Stocks Are Still a Buy

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

Last Wednesday, after I woke up, I immediately switched on to CNN and heard the news that Barack Obama will remain in the oval office for four more years. Later that night I checked out how stocks were doing on my iPhone, and all I saw was a barrage of red!

There were a few exceptions though, most notably Sturm, Ruger & Co (NYSE: RGR) and Smith and Wesson (NASDAQ: SWHC), which traded up sharply after the election. These are the two publicly traded gun manufacturers that have been on a tear for the last 4 years, ever since Obama took office.

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 Data by YCharts

These gains weren't hot smoke coming out of the end of a revolver, mind you; they were  supported and justified by strong fundamentals.

Here's a chart of their revenue growth over the past 5 years. Both companies have grown revenues by a considerable degree; however, Sturm, Ruger & Co grew revenues three times as much as Smith & Wesson.

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Data by YCharts

Below is a chart of each company's earnings over the past 5 years. Sturm, Ruger & Co's income growth is even more impressive than its revenue growth. Meanwhile, Smith & Wesson's earnings had some wild rides over the past few years, but their latest results are still up by 200%.

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Data by YCharts

The Obama Surge

It was almost like yesterday when I was watching a segment on MSNBC in early 2009 that showed how guns were selling like hot cakes, and a guy from the NRA next to the reporter remarked that this was a sign of people protecting their rights and freedom.

Economical theory holds that one of the non price determinants of demand are future expectations

The so called 'Obama surge' in gun sales is fueled by the perception that President Obama will re-introduce the the Assault Weapons Ban of 1994 or introduce other gun control legislation. A Romney win would have been expected to ease fears about gun control and cause the gun bubble to burst. It's actually quite funny how the perception diverges from their actions as President and Governor. 

Romney, when he was Governor of Massachusetts, signed into law a State Assault Weapon ban in 2004 after the Federal ban expired; this is the same piece of legislation that gun right activists are frightened Obama will push for. Meanwhile, the only bill that Obama has signed into law expanded gun rights, allowing guns to be carried on national park lands and Amtrak trains.

However, there are some concerns that Barack Obama might push for more gun control in his second term. He did mention in his second debate with Romney that he would like to re-introduce the Federal Assault Weapons ban. His voting record while he was in the Senate also happens to show that he is more supportive of stricter gun control. 

The Waning of Gun Control

However, the likelihood of any restrictive gun control passing in Obama's second term is slim at best. For one, the House is still controlled by Republicans, and a lot of Democrats support gun rights. Democratic Congresswomen Gabrielle Giffords, a supporter of gun rights, who was shot in Arizona in 2011 and made a miraculous recovery, didn't push for any gun control laws after she recovered. Congress also didn't pass any serious gun control legislation after the incident. If a Congresswomen getting shot doesn't lead congress to take a tougher stance on guns, I don't know what will.

The public's perception about guns is also not the same as it was in 1994 when the temporary Federal Assault Weapons ban was passed. There is much less anti-gun sentiment right now. A recent poll by Gallup showed that 74% of Americans oppose any legislation that would ban or restrict civilian ownership of firearms. Another poll in April 2012 among independent voters showed that 55% believe it is more important to protect gun ownership than to control guns.

One reason could be due to the fact that even though gun sales have soared, violent crime rates, including murder, have been steadily declining in the last 20 years after they had peaked in the early 1990's. The murder rate of 4.8 in 2010 was half of the 9.5 it was at when President Bill Clinton took office in 1993.

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Chart from Wikipedia,  Source: US Bureau of Justice

Senior Citizens: Locked & Loaded

Other than fears of a crackdown on firearms, demand has naturally increased due to the larger number and greater diversity of people that now own firearms. This trend started even before Obama took office. In 2002,  the number of NICS, or National Instant Background Checks, performed was 8.4 million. In 2008, the year before President Obama took office, they reached 12.7 million. Last year, the number of NICS performed reached 16.4 million. NICS are instant checks to see if a person is eligible to purchase a firearm. 

In 2006, Wal-mart (NYSE: WMT) decided to stop selling rifles, shotguns, and ammunition at all but a third of its US stores. In April of 2011, the company went back on that decision and decided to cut back on electronics floor space to make room for rifles, shotguns and ammunition at hundreds of U.S. stores due to the spike in gun sales. You know that the increase in demand is real when the world's largest retailer is getting in on the trend.

Lawrence Keane, senior vice president of the National Shooting Sports Foundation, then commented on Wal-mart's decision to restore guns to many of its stores by saying, "There are still a lot of first-time buyers, the personal defense shotgun market is doing very well."

The beginning of the retirement years for the Baby Boomer generation puts a lot of focus on the Healthcare industry, however the gun industry is also bound to benefit due to the need of older citizens to protect themselves. It should be noted that the one of the top lobbyists for the NRA is Marion Hammer, a 73 year old grandmother. You can check this Bloomberg segment for more on this phenomenon. 

Gun sales also tend to increase at times of economic uncertainty, and with the Fiscal Cliff and the next round of Debt Ceiling debates approaching, there is a lot of uncertainty in the air; this was displayed by the performance of the DJIA after the election.  

Last Wednesday, on Street Smart, Host Trish Regan asked guest Mark Faber how should investors protect their investments in these time; he replied, "They should buy a gun, a machine gun!"

Foolish Bottom Line

I believe that both Sturm, Ruger & Co and Smith and Wesson will perform strongly in the coming period due to the fear of gun control legislation, even though it's not likely to be passed. I especially like Sturm, Ruger & Co as it's more reasonably priced at a P/E ratio of 16, versus 21 for Smith and Wesson. It also happens to be the larger of the two companies, and its stock chart looks impressive from a technical perspective. The company recently shattered analyst estimates for both top and bottom line results in the third quarter and from recent demand at gun outlets, looks to boast an impressive fourth quarter. The stock also has a 4 star rating at Motley Fool Caps.

Pirlo0o 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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