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Regulation Won't Change Gun Demand

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

Last week's tragic mass shooting in Connecticut sparked the age-old debate of gun control. It has been a no-man's zone for moderate Republicans and conservative Democrats who feared political retribution from the National Rifle Association (NRA). The powerful gun lobby has a singular focus and has been successful at keeping gun control off the policy agenda. However, since Newtown investors have added a regulatory risk premium to stocks like Smith & Wesson (NASDAQ: SWHC) and Sturm, Ruger & Company (NYSE: RGR), two of America's biggest gun manufacturers. I've seen dozens of articles proclaiming that gun control is on the way and advising investors to sell these stocks. I think they are mistaken, but let’s look at their arguments first. 

BEAR PITCH

  1. Most people are realizing that Connecticut is a turning point on this particular issue. As opposed to when the other recent shootings in Aurora and Tucson happened, a majority of Americans believe that last week's incident was not an isolated event. Fifty-two percent believe that there is a systemic problem and among the most popular remedies are (1) banning assault weapons and (2) limiting the number of bullets that a magazine can hold.
  2. Already, Senator Dianne Feinstein (D-Calif.) has vowed to reinstate the assault weapons ban that had been in place from 1994 to 2004. And she is most definitely not alone; even NRA darlings like Joe Scarborough and Senator Joe Manchin (D-W.Va) have conceded that the proliferation of military-style weaponry and high-capacity magazines have gotten out of hand. 
  3. President Obama has created a task force that will recommend policies to stem gun violence in America. 

Both SWHC and RGR shares took a tumble yesterday as a result of this thinking but I believe that was just a panicked sell-off and both stocks will rebound. Allow me to explain.

BULL PITCH

1)  The term "assault weapon" is arbitrary and does not cover all or even most of military-style firearms. The original bill was so specific in nature that slight changes to the design would preclude it from the ban and that's exactly what most manufacturers did back then. So they will do it again.

2)  With Republican orthodoxy as pro-gun and anti-tax it seems near impossible that a "gun tax" or a "bullet tax" will be implemented. Limiting magazine sizes only means that people can't load thirty bullets at a time, not that they can only buy ten bullets at a time. Any bill from the Senate is sure to be watered down by the Republican-controlled House if it has a chance of being passed into law.

3)  Any policies recommended by the task force still have to pass the House, so it will be watered down. Also, during his first term, President Obama did not pursue gun control as a legislative priority, but the popularized notion that he was "out to get the guns" prompted a surge in weapons sales. From his inauguration day till last Friday, SWHC and RGR share prices are up 272.65% and 656.98%, respectively. If gun enthusiasts are faced with more tangible restrictions on their Second Amendment rights, we can safely assume they will once again stock up; just on different guns this time.

So if you have either of these stocks in your portfolio, the next few weeks might be scary but hang in there. Keep in mind that share prices should reflect the expected earnings of a company, not people's political opinions of them. When the dust settles people will realize one thing: the politically viable regulations will be ineffective in significantly curbing the demand and ability to purchase weapons.


slightlywonkish has no positions in the stocks mentioned above. 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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