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Investors Are Loading Up On Gun Stocks

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While it’s impossible to separate out the sector’s social and political ramifications, investors in America’s gunmakers have clearly benefited from a surging demand for weapons.

Last week, Smith & Wesson Holding Corp (NASDAQ: SWHC) reported better-than-expected quarterly results, with sales rising 61% to year-over-year to $210.8 million and profit jumping to $31.4 million from $8.1 million a year ago.

According to the Wall Street Journal, the company’s CEO, James Debney, told analysts on a conference call that the demand for firearms is a result of short-term influences of “potential impact of news events and the current political environment.”

Smith & Wesson said firearm net sales jumped 56.4% to $194.7 million in its latest quarter, up from a year earlier, the Journal reported.

Meanwhile, peer Sturm Ruger & Company’s (NYSE: RGR) stock rose following its quarterly results that handily beat Wall Street expectations, according to a Reuters report.

Related gun investments have similarly followed suit: The “Guns” segment of the Guns, Guards and Gates motif has risen 18% in the past month.

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The entire motif has gained 18.2% in that time, while the S&P 500 has increased 6.5%.

Over the past 12 months, the motif has gained 3.4%; the S&P 500 is down 3.4%.

As Reuters pointed out, gun stocks have climbed steadily in recent years in part due to massacres like last December’s shooting in San Bernardino, California that have increased calls for gun control.

Over the past five years, for example, Sturm Ruger’s stock has more than tripled, dwarfing the S&P 500’s 45% increase.

Democratic presidential front-runner Hilary Clinton has been pushing for new rules to make background checks more comprehensive and close loopholes on certain gun purchases. Such calls in the past have led people to buy more firearms out of fear that limits are coming, according to Reuters.

Indeed, Sturm Ruger expects a lift in demand for its firearms if a Democrat wins this year’s presidential election and becomes positioned to appoint future Supreme Court justices, the company’s CEO Michael Fifer said on its conference call, according to Reuters.

“I think we’ll see a step up in demand if a Democrat wins the election, particularly so if they win the Senate,” Fifer said.

After conservative Supreme Court Justice Antonin Scalia died last month, replacing him has become a major flashpoint between President Obama and Republican lawmakers, the outcome of which could tilt the balance of the nation’s highest court on numerous decisions, including gun control, Reuters reported.

But Fifer also looked beyond the current vacancy to future potential openings should any of the remaining eight justices leave the court.

“Despite whether President Obama is successful in appointing a Supreme Court justice, it’s more than likely, based on age and health, that the next president will get several opportunities, and that could drive concerns about gun rights,” Fifer said.

Gun sales also have gotten a boost from worries about crime following urban unrest in recent years in Ferguson, Missouri and other cities where residents protested police killings of young black men.

The sector’s longer-term returns lave led portfolio managers to make gun-related stocks major holdings in mutual funds, Reuters noted.

“The firearms industry enjoys a sweet spot with the American consumer, and we believe shares of (Sturm Ruger) should be bought,” Dougherty & Company analyst Andrea James wrote in a research note following Sturm Ruger’s report.

In the short term at least, the bullish sentiment was echoed by Cowen analysts, who noted in a recent report that adjusted numbers tracking FBI background checks, a rough indicator of sales, rose 16% last month.

“The overall gun-market vigor reflects another month of ‘surge’ demand driven by fears of regulatory initiatives and potential terrorist attacks,” the analysts wrote.

Once both political parties have chosen their respective nominees, investors in gun stocks may consider national election polls as a proxy for further upside – or downside — in their holdings.

Performance returns, including 1-month Return/Return Since Inception/1-year returns indicates the performance of this particular motif over that stated period of time as of the date provided. Performance is quoted for informational purposes only, however, there is no guarantee those returns will continue.

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