Stocking Up on Gun Stocks a Short Term Play

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As Gun Control Heats Up, So Do Gun Company Stocks

by T.R. Sprackland

President Obama may be seen by the National Rifle Association members as their sworn enemy, but gun manufacturers should be grateful to him.  Fear of gun control has been so pervasive since his first election that buying panics continue to roil the weapons and ammunition supplies, pushing up manufacturers’s stock prices. That’s because fear of shortages creates buying panics. Back in 1973, talk-show host Johnny Carson made a joke about a shortage of toilet paper—and inadvertently caused one. Store shelves emptied as panicked consumers rushed to stock up on the Charmin.

In a tragic counterpoint to that old joke, the massacre of children at Sandy Hook by a gunman wielding advanced weaponry has pushed the debate on gun control to a level not seen in years—and gun owners are responding in a buying panic that has actually left shortages of ammunition for some police forces. And the buying has triggered a January surge in stock prices among gun companies. Gun manufacturers such as Smith and Wesson Holding Corp (NASDAQ: SWHC) and Sturm, Ruger & Co. Inc. (NYSE: RGR) did see a sharp December decline immediately after the Sandy Hook massacre on fears that President Obama would be able to invoke executive orders that might halt gun sales. But since then, stocks have rebounded as gun buyers rushed to stock up. Alliant Techsystems Inc. (NYSE: ATK) and Olin Corp (NYSE:OLN) are also affected as they supply ammunition.

“Buy the rumor, sell the fact” is an old axiom in the stock market. So although gun companies’ stocks have surged on rumors that President Obama will be able to push through legislation—and enact executive orders—that will limit access to certain types of guns and ammo, stock pickers should be aware of the potential for loss if the rumors calm down and a clear direction towards a new level of gun control is established.

That, however, is not likely to happen overnight. The controversy surging in our nation is far too intense for any immediate resolution. Vice President Joe Biden has been tapped by the President to get the ball rolling. Also onboard is Gabby Gifford, the Arizona congresswoman who, on January 8, 2011, barely survived the onslaught of a gunman who killed 6 and wounded 12 people before he fumbled while reloading his weapon and was brought down by civilian bystanders. She joined Biden and New York Mayor Michael Bloomberg on the cover of January 28, 2013 TIME magazine as the tough trio prepared to push the issue. Gun control has gone from the issue that dared not speak its name during the Presidential election campaign to being the key controversy of the newly re-elected Administration.

The corporate response has been ambivalent. Cerberus Capital Management L.P., a New York City-based private equity firm that owns the privately owned Freedom Group (PrivCo Private Company Ticker Symbol:FREEGRP) that makes the Bushmaster rifle used by the gunman at Sandy Hook, has announced its plans to sell its stake in Freedom Group.

Groupon (NASDAQ: GRPN), the online coupon-providing company, canceled all gun-related deals  available through its site on concerns that entertainment that uses guns would be harmful to the social buying site’s image. Yet its competitor, LivingSocial (PrivCo Private Company Ticker Symbol: LIVINGP), has continued to offer gun deals. For there is a vast swath of land between the East and West Coast inhabited by folks to whom gun shows, hunting expeditions and target shooting is a normal part of life. Big-city folks, by contrast, have a more juandiced view, as evidenced by the cover photo on the New York Post last week showing New York City Police Commissioner Ray Kelly holding up a handgun, with the quote “This is the Enemy: Handguns Worse than Assault Rifles.”

So, stock pickers, take your pick. If you think the run on the ammo counter is not yet over, then gun stocks make sense. If you think it’s a flash in the pan, then perhaps it’s time to pull back. In the long term, stocks related to this country’s hunting-and-fishing culture might be a better bet. For example, Cabela's Incorporated (NASDAQ: CAB), Dicks (NASDAQ: DKS) and other suppliers might offer an opportunity to benefit from price runups while offering a wider base of product sales to cushion any declines after the political controversy settles down.

After all, “buy the rumor and sell the fact” usually determines the market direction.

FULL DISCLOSURE: T.R. Sprackland has “no dog in this fight” with no stock position on any company mentioned in this article. However, family members have, for more than three generations, been elk hunters and have relied on hunting and fishing to supply part of the family larder.

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