Gun Stocks Soar as Debate Continues

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

If there's one thing investors have learned from the national gun debate, it's this: when consumers feel something may be taken away, sales skyrocket. Especially when that something is an item they're passionate about. Like firearms.

So when Smith & Wesson (NASDAQ: SWHC) released its fourth quarter earnings report, no one was surprised to learn sales shot up 38% to $179 million. The company has experienced a sales increase of 43% over the past year, with sales surging after major tragic events.

Fear drives sales

Smith & Wesson noted that the Newtown shooting seemed to spawn the biggest round of purchases. In fact, nine out of ten of the busiest days for background checks in history followed that shooting. Sales also increased following last summer's shooting in a Colorado movie theater. Analysts believe this can be tied to two things: citizens' needs to protect their families, and public outcry for increased gun control.

As gun enthusiasts began to worry the government may someday take guns away, Sturm, Ruger & Company (NYSE: RGR) started seeing higher demand for its guns as well. The company reported a 53% increase in earnings for its first quarter, even higher than that reported by Smith & Wesson.

Both Smith & Wesson and Sturm, Ruger & Company sell a wide range of firearms, including semi-automatic weapons. As lobbyists continue to call for a ban on assault weapons, gun aficionados are stocking up on these weapons in case they might be off the market.

Perhaps the biggest challenge for companies like Sturm, Ruger and Smith & Wesson is keeping up with demand. Hunting retailers like Cabela's have seen growth in sales as customers shop for firearms. Keeping enough guns and ammunition in stores has proved challenging for both retailers and manufacturers.

Ammunition in demand

Sales of Winchester Ammunition helped Olin (NYSE: OLN) with its 27.5% increase in sales. The company said sales began an upward climb just before 2012 election day and have been high since. The company reported an increase of more than 190% in quarterly year-over-year earnings and analysts expect sales to remain high for the rest of 2013 and beyond.

Winchester rifle sales are holding strong as well, although its Model 70 Classic bolt action hunting rifle is often overshadowed by Remington. Its nostalgic factor makes it a favorite of collectors, though, and it has long held the nickname, "the rifleman's rifle."

Learning from history

One of the best ways to know what to expect if lawmakers ever decide to pass a weapons ban is to look at recent history. The assault weapons ban in place from 1994-2004 brought no noticeable increase or decrease in crime, according to research from the U.S. Research Council. When the ban was lifted, sales of guns spiked briefly, but the sales increase was short-lived.

In the end, it seems Smith & Wesson, Sturm, Ruger & Company, and Olin benefit from the possibility of a weapons ban, as long as the weapons ban never goes through. Each of these three companies is a good investment, but Smith & Wesson's history of solid performance seems to make it the best bet at the moment.

However, the choice isn't quite that easy. Sturm, Ruger focuses on quality, offering products well ahead of the competition. Its complete lack of debt makes it a promising stock, especially considering Smith & Wesson is currently $44 million in debt. However, Smith & Wesson's lower price seems to make it an enticing stock for investors who want a good bargain.

Also, Smith & Wesson has history behind it, going back 160 years. Competition is good for one of the world's oldest-standing gun manufacturers, but if Smith & Wesson doesn't keep up with changing trends, the company may find itself surpassed by Sturm Ruger's competitive edge.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Stephanie Faris has no position in any stocks mentioned. 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

Compare Brokers

Fool Disclosure