Is “The Gun Trade” Coming to an End?

Today’s observation is not one that is calling the end of guns nor for any Mad Max rush, but it seems like the great growth trade may have run its course now that the election outcome is known.

We could beat around the bush and talk about the need for self-defense or how the economic weakness increased fear, and try to say that those two issues drove gun demand. The reality is that the gun demand was a political trade as many in the public feared a change in public policies about gun ownership. In short, the gains in the shares of these two gun makers were largely driven by fears about what may happen or could happen in a second Obama administration.

When Smith & Wesson raised its guidance last night, there was one of two takeaways for investors. Either the company was only saying that sales would be mostly in-line with expectations in the next two quarters of the year, or the company was merely sand-bagging forward estimates. Wedbush Morgan has now downgraded S&W to ‘Neutral’ from ‘Outperform’ after its guidance. Shares are down 2.6% at $9.79 against its 52-week range of $2.72 to $11.24.

Shares of Sturm, Ruger & Company are trading higher today by over 5% to $51.50 against a 52-week range of $29.11 to $58.42. The gain is after the company declared a special dividend of $4.50 per share to be paid before year-end ahead of the dividend tax-hike. Management said that company can still fund its high rate of organic growth, including expected increases in both working capital and capital expenditures, and that it can fund its quarterly dividend while still growing our cash reserves at a modest rate. Management also said that it can still pursue good opportunities that come its way under its new product development strategy while it also continues to seek accretive acquisition opportunities and expand its manufacturing.

Sturm, Ruger is worth some $987 million after today’s gains but Smith & Wesson is worth about $638 million in market value today. The reality is that both companies still have growth opportunities ahead, as long as no surprise legislation or rules on gun sales come into play. It also needs to be said that neither stock is expensive. Still, the gains of 2012 and part of 2011 are going to be difficult to repeat and it seems obvious that there could be more “sell the news” reactions in the weeks and months ahead.

As noted earlier, it is still very possible that these companies have more gains ahead. Prudent investors do not have to lock in all of their gains just to call a victory. Investors can take some money off the table but still leave some skin in the game.

JON C. OGG