Now That Gun Control Has Failed, It’s Time to Buy Gun Stocks

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

Yet another blow was delivered to proponents of gun control on Tuesday, when four Democratic Senators opted to break with their party and vote against expanding background checks for gun purchasers.

The bipartisan Manchin-Toomey amendment was seen as the weakest of the proposals aimed at restricting gun ownership; with it failing, the regulatory threat facing companies like Sturm, Ruger (NYSE: RGR), Smith & Wesson (NASDAQ: SWHC) and Cabela’s (NYSE: CAB) has vanished entirely.

President Obama: a gun bull’s best friend

Obviously, this topic carries a high degree of political controversy, but this piece is in no way meant to be political. It is an objective fact that while Obama has been in office, gun sales have exploded to record levels -- along with the profits of the companies selling them.

Since Obama was inaugurated on Jan. 20, 2009, shares of Sturm, Ruger are up an astounding 671%. Competitor Smith & Wesson is up a less impressive (though still incredible) 231%. Cabela’s, which is a major gun retailer, has rallied nearly 900%. For comparison, the S&P 500 is up about 83% over that time.

<img alt="" src="" />

<img alt="" src="" />

<img alt="" src="" />

There are likely a number of factors behind the explosion in gun sales, including a lingering fear of a global economic collapse exacerbated by the financial crisis of 2008. TLC’s reality show “Doomsday Preppers” has, over 30 episodes and two seasons, profiled dozens of American families stockpiling guns in fear of the coming apocalypse.

But looming large has been a belief held by many Americans that Obama wants to confiscate guns. A Rasmussen poll revealed that 44% of Americans believe this. Even Phillies’ pitcher Jonathan Papelbon harbors this idea, remarking in an interview that “Obama wants to take our guns from us.”

The government has created a false sense of scarcity

Until the tragedy at Sandy Hook Elementary, Obama and the Democrats have made no meaningful attempt at gun control. Yet, the paranoia that it was only a matter of time has fueled the rise in sales.

This can be seen when, just after the Sandy Hook shooting, guns sales exploded to an even greater degree. For, after four years of being in office, Obama was finally planning to confront the issue of gun control.

A sense of scarcity has long been known to drive sales -- it’s accepted as common sense. Many companies utilize the principle when they can, including Lululemon, which intentionally keeps a limited amount of its product in stores.

No meaningful regulation is coming

In a previous piece, I predicted that attempts at restricting gun sales would fail. With Wednesday’s events, that seems ever more likely.

The Manchin-Toomey amendment was weaker than other proposals, most notably, Sen. Diane Feinstein’s drive to restrict sales of assault weapons. If it had passed, the amendment would have expanded the process of background checks on gun purchasers, but had a number of major loopholes: most notably, sales to “friends” would not be subject to background checks.

President Obama has pledged to continue

That said, Obama has vowed to keep fighting. In a passionate speech delivered shortly after the amendment failed to pass, Obama pledged that it was merely “round one” in the ongoing debate.

Yet, if such a watered-down amendment like Manchin-Toomey is incapable of passing a Democratically-controlled Senate (nevermind a Republican House), how can anyone expect meaningful future gun control legislation?

At the same time, Obama’s unwillingness to abandon the issue should keep the fear of coming legislation in the minds’ of the gun-buying public. Obama’s decision to keep pushing for restrictions -- restrictions that will never come -- will only continue to fuel the gun-purchasing frenzy.

The case for gun stocks

Gunmakers Sturm, Ruger and Smith & Wesson are both fairly heavily shorted. As of the last report, roughly 27% of Sturm, Ruger’s shares have been bet against, while 22% of Smith & Wesson’s have been sold short.

Many of these short sellers may be banking on regulation coming to derail these companies’ business models. If that’s the case, they’ll be forced to cover in the coming months when both companies continue to post solid sales.

Cabela’s is less linked to guns, but as a major gun retailer, the company has a great deal of exposure. After the Sandy Hook shooting, shares of Cabela’s dropped from the mid $40s to near $39.

How I could be wrong

Currently, I’m long both Sturm, Ruger and Smith & Wesson. I plan to hold my shares until the short interest on both drops below 15%. I believe that both companies will continue to report solid quarters for the remainder of the year, which should scare shorts into covering.

But I don’t wish to play Warren Buffett with my gun investment. The problem with guns from a sales perspective is that they last -- a very, very long time. A gun that is taken care of is an extremely durable good, and can easily outlive its owner.

At some point, the gun market will become fully saturated and sales will drop. When that happens, gun stocks will inevitably decline. But I don’t expect that to occur while gun control still remains in the headlines.

Joe Kurtz owns shares of Sturm, Ruger and Smith & Wesson. 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!

blog comments powered by Disqus