Negative publicity and threats to a public company’s marketability normally decrease its stock value. But not with gun and ammunition stocks.
After violent episodes, these stocks usually spike.
Following the Orlando, Florida, massacre at Pulse nightclub, shares of both Smith & Wesson Holding Corp. (ticker: SWHC) and Sturm, Ruger & Co (RGR) rose 10 percent. Ammunition maker Vista Outdoor (VSTO), the specialty chemical company Olin Corp. (OLN) that owns the Winchester gun brand, and sporting and hunting goods retailer Cabela’s (CAB) rose as well.
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Sales also rise when a president starts talking about tighter gun control, which leads to more gun sales. After President Barack Obama spoke about tighter gun laws in 2015 following a year in which U.S. mass shootings claimed the lives of 475 people, a record-high 3.3 million people applied for gun background checks in December, with 2.5 million more in January and 2.6 in February, according to FBI reports.
Applications in past years were mostly fewer than 2 million per month. Some states allow applicants to buy more than one gun per application.
The formula. “Gun company stocks correlate negatively to good news and NRA Republicans in office,” says Sander Read, CEO of Lyons Wealth Management in Orlando. “So I would say with a (Donald) Trump win: stock sell-off, and with a Hillary (Clinton) win: stock rally. Unfortunately, any time a terrorist or assault weapon violence occurs, stocks rally.”
Experts predict at least a short-term rally in gun stocks if there is a Clinton victory.
“In the short term, gun and ammo manufacturers and retailers stand to benefit from tighter gun control laws,” says Robert R. Johnson, president and CEO of The American College of Financial Services. “The mere mention of enacting any sort of gun control laws sends gun advocates to retailers selling guns and ammo. These individuals fear that they will be precluded from buying certain types of guns and ammunition once stricter laws are on the books.”
The irony is clear.
“A Clinton victory would likely lead to consideration of potential gun control legislation. Thus, even though the preferred candidate of the National Rifle Association is Donald Trump, at least in the short term, stockholders of gun and ammo firms may be silently rooting for a Clinton triumph,” Johnson says.
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The numbers. Whether for personal protection or the fun of shooting, it is estimated that there are 400 million guns in the U.S., and that number could increase to a half billion by the time the next president seeks re-election, according to National Review.
“Whenever there’s an election, people run to the gun store before the Second Amendment is repealed. SWHC and RGR are the main beneficiaries. They sell guns and ammo but you’d better hope ammo sales don’t skyrocket in a nation with 1.3 guns for every citizen,” says Phil Davis, publisher of Philstockworld.com and director of PSW Investments. “SWHC is trading at about the all-time high and RGR a bit under theirs at $66 and both are fully valued at these levels.”
The stocks. Like Davis, Johnson is also focusing on pure play gun and ammo manufacturers including Smith & Wesson and Sturm Ruger.
“Investors wishing to make a pure play in the market regarding potential gun control legislation would be wise to consider buying these equities,” he says.
Another company that could surge is Olin, Johnson says.
“Olin is technically classified as a specialty chemicals company, but one of its three business segments is Winchester — the iconic gun manufacturer. Twenty-five percent of Olin’s sales in 2015 were in its Winchester segment,” he says.
Two other firms that potentially could be affected by gun control legislation are broad sporting goods retailers Dick’s Sporting Goods (DKS) and Cabela’s, he says. “However, gun and ammo sales are a small percentage of the sales of these firms.”
The rally’s prospects hinge on how long it would take to pass legislation and whether the new president would seek to limit all gun sales, or just assault weapons.
“Hillary is not anti-gun nor was (Vermont Sen. Bernie) Sanders,” Davis says. “There simply is not a real push from the Democrats to stop anything but assault weapons, and they are a very, very small part of gun sales, so there’s no material impact on the gun companies.”
One in four adults own at least one firearm, according to a 2004 survey by Injury Prevention, and that number is believed to have grown.
“If they do act and tighter gun restrictions are enforced we have to see what those restrictions are before we can say for sure what the impact will be on gun/ammo companies,” says Matthew Tuttle, chief executive of Tuttle Tactical Management in New York.
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“Conventional wisdom tells us tighter policies may adversely affect their sales and earnings because less people will be able to buy guns,” he says. “In order to know for sure, we have to actually see what, if any, the policies are.”
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5 Stocks That Could Be Affected by Tighter Gun Control originally appeared on usnews.com
