David Sterman

What's the first thing people do when they hear about major shootings by a mentally unstable gunman? They go out and buy guns. These shocking news events tend to spook people, so they instantly take steps to ensure they don't fall victims to the next shooter. As an example, gun sales in Arizona rose 60% on the day after Congresswoman Gabrielle Giffords and others were shot on Jan. 8, 2011, according to the FBI's National Instant Criminal Background Check System.

More broadly, gun sales have been above historical trends ever since President Obama took office. Supporters of the Second Amendment to the Constitution have suggested that the Obama administration would make it much more difficult to acquire guns, so they loaded up on firearms in advance of any tighter measures.

Though tighter gun regulations never took effect, sales surely benefited anyway. And for gun maker Sturm Ruger (NYSE: RGR), it's been a boom time, as shares have risen roughly 1,000% since late 2008. Indeed shares have risen a solid 30% since my colleague Michael Vodicka profiled the company in late June.

Yet the road ahead for Sturm Ruger may prove to be much bumpier. At least according to short sellers. They hold 7.8 million shares in their accounts, which equates to a stunning 42% of the stock float and represents roughly 19 days' worth of trading volume. (Short data as of Sept. 14, 2012, which was released on Sept. 25, 2012.)

Why are the shorts making such a big bet? Well, a few key issues come to mind.

The first is a matter of competition. As Sturm Ruger gained in popularity with gun owners, rival Smith & Wesson's (Nasdaq: SWHC) fortunes seemed to wane. As a result, shares of Sturm Ruger rose ever higher during much of President Obama's presidency, while shares of Smith & Wesson slumped.


David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com