The Best Four Gun Stocks to Buy

Posted: Mar 08, 2016 12:01 AM
The Best Four Gun Stocks to Buy

By: Greg Miller, Senior Analyst

Completely against his intentions, President Obama has proven to be the greatest gun salesman in American history.

Throughout his presidency, the fear of more gun control regulations has sent gun sales soaring on several occasions.

In turn, shares of gun manufacturers and gun-related stocks have risen sharply, too.

In early January, Obama announced an executive order aimed at tightening gun regulations, following a spate of mass shootings – an announcement that triggered a price spike in the likes of Smith & Wesson Holding Corp. (SWHC).

However, his ability to unilaterally impose gun control regulations is highly limited. He has virtually no chance of getting gun laws through a Second Amendment-friendly Congress.

But the recent death of U.S. Supreme Court Justice Antonin Scalia offers a chance to shift the terms of the debate significantly.

Will Scalia’s Death Boost Gun Sales?

It’s no secret that Scalia was a passionate and persuasive defender of the Constitution – including the Second Amendment.

In the famous Heller case, he declared, “The Second Amendment protects an individual right to possess a firearm unconnected with service in a militia and to use that firearm for traditionally lawful purposes, such as self-defense within the home.”

Never before had the Supreme Court spoken with such clarity about the Second Amendment.

Now, with Scalia gone, it’s all but certain that his replacement will be a less ardent defender of Scalia’s reading of the Second Amendment.

The uncertainty in the meantime has proven bullish for gun-related stocks. Since Scalia’s death, shares in these stocks are up between 9% and 13.5%.

But is this a classic case of “buy on the rumor, sell on the news”?

Four Stocks to Play the Rising Gun Industry Trend

While gun stocks have performed extremely well during the Obama administration, they’ve tended to trade off the peaks that they hit shortly after politically-inspired spikes. Dealers ordered too much stock and then struggled to sell their bloated inventories.

But with Obama’s term coming to an end, the great inadvertent gun salesman is retiring.

Of the presidential candidates, all of the Republicans are pretty gun-friendly, as is Bernie Sanders on the Democratic side. Hillary Clinton is less gun-friendly, but the kind of hysteria that accompanied the Obama administration is unlikely to continue in a Clinton presidency.

But there are other secular trends that are helping the gun industry.

For example, millennials are embracing shooting sports. Colleges and even high schools are instituting gun clubs, with students attracted to the sport’s inclusiveness and its safety, relative to contact sports.

According to the National Shooting Sports Foundation, the number of sports shooters in the United States increased from 34.4 million in 2009 to 51.2 million in 2014.

So how is all of this affecting gun-related stocks? Let’s look briefly at the four shown on the chart above:

~ Smith & Wesson Holding Corporation (SWHC)

Smith and Wesson is obviously a renowned name in the gun industry, but did you know that the company nearly went bankrupt after a disastrous deal with the Clinton administration in the 1990s triggered a consumer boycott?

Today, though, Smith & Wesson has enjoyed 9% annual revenue growth over the past five years, even after a 15% decline last year because of its excess inventory. It’s a pure-play gun stock – it sells only guns, ammunition, and related enforcement accessories such as handcuffs and training academies for police departments.

Since sports shooting guns tend to be more expensive than those for hunting and home defense, the company will benefit from the demand for higher-end guns. But it doesn’t manufacture ammunition, nor does it have a line of shotguns, both of which are key beneficiaries of the increase in sports shooting.

~ Sturm, Ruger & Co. (RGR)

Another pure-play, Sturm, Ruger & Co. sells only firearms and only under the Ruger name. Like Smith & Wesson, handguns dominate the company’s sales and it lacks an ammunition division or a shotgun offering.

While both of these companies offer good potential for investors, Smith & Wesson has handily outperformed Sturm, Ruger & Co. over the last five years… and still only trades at half of Sturm’s valuation.

If you’re looking for pure-play exposure to the firearms market, separate from the growth in shooting sports, Smith & Wesson is the stock to choose. But I think you can do better with more diversified plays…

~ Vista Outdoors Inc. (VSTO)

Vista is the new player in the firearms market. Spun off from Alliant Techsystems early last year, Vista makes Federal Premium and other lines of ammunition, plus Savage Arms long guns.

Firearms and ammunition represent only 50% of its sales, though – and that percentage is likely to decline, as the company has been busy acquiring other outdoor-related companies such as Bushnell optical products, Bell recreational helmets, and CamelBak water storage.

~ Olin Corp. (OLN)

Olin Corp. makes Winchester ammunition under license. However, the company has invested heavily in its other businesses, primarily chlorine-related chemical products, so only 12% of the company’s sales are firearms-related.

The chlorine business is in big trouble right now, so a turnaround there could bring good rewards to chemical investors. But if you’re looking for more of a play on firearms, you’re better off with one of the other three companies.

And the Winner Is…

Ultimately, I believe Vista is the best firearms play – for two reasons:

  1. Shooting Sports: These activities are more ammunition-intensive than hunting and self-defense applications. The company’s firearms are more focused on this area than Smith & Wesson or Sturm. In particular, Vista has a line of high-end shotguns tailored to clay, skeet, and trap shooting.
  2. Diversification: Vista’s acquisition of other outdoor-related businesses give it better strategic relations with “big box” outdoor retailers such as Cabela’s and Bass Pro Shops – both of which are increasing their share of the outdoor products business, including firearms. While Vista’s firearms business makes up only half of its sales, that business is already larger than Smith & Wesson’s and Sturm’s combined. So it makes plenty of sense for Vista to use the cash generated by its firearms business during good years to expand its non-firearms offerings. Riding on the coattails of Cabela’s and Bass is even smarter, too. Rather than chasing fear of gun regulations, the company takes a longer-term view of outdoor sports in general.

Keep in mind that the overall firearms market isn’t particularly large. Plus, it’s cyclical and fairly highly fragmented.

If you do want to play on gun owners’ fears, the time to do so is when those fears subside a little, taking share prices down with them. There’s always likely to be another cause for concern among gun owners in the not-too-distant future.

To living and investing in the future,

Greg Miller

Greg Miller has spent over 20 years in the financial industry, working up from analyst, to portfolio manager, and eventually to an institutional investor, where he managed over $400-million worth of assets in mutual funds and private accounts. He’s helped finance some of America’s biggest and most successful companies, such as Qwest Communications (now CenturyLink), plus some of the largest LBOs of all time, like Energy Future Holdings and First Data. His high-level positions also gave him a front-row seat to some of the greatest meltdowns in financial history – Enron, WorldCom, and General Motors. And his rich background has given him incredible insights into the inner workings of “the Street” – and how to identify the movers and shakers within it.