Last week, Chicago Mayor Rahm Emmanuel asked six mutual fund companies to sell off stock holdings in gun manufacturing companies Sturm, Ruger & Company (NYSE:RGR) and Smith & Wesson Holding Corporation (NASDAQ:SWHC). City officials in other major cities around the U.S. have considered taking similar action in addressing gun holdings in their pension funds. With gun violence taking center stage after the Newtown, CT tragedy, it’s tempting for many investors to make a moral statement with their investment portfolios. But is that really a prudent financial decision?
Why Gun Companies Make Good Investments
No matter what your views on gun control, gun manufacturers aren’t going anywhere, for two reasons. First, the goal of most gun lobbyists isn’t to eliminate guns altogether. It’s simply to put restrictions on them for safety reasons. That means guns will still be bought and sold by private citizens, as long as they adhere to the regulations. Second, guns are necessary for the military and law enforcement. Even gun bans such as the one proposed for assault rifles would not affect military purchases, meaning that these weapons will still be manufactured and sold.
Over the past decade, Smith & Wesson and Sturm, Ruger have both realized significantly higher returns than the broader market (17% and 23% respectively). Fund companies and 401k managers must make decisions based on the best interests of their clients. If a social issue like gun control has the potential to affect the value of the stock long-term, then those companies must consider that in their buying and selling decisions. However, selling off a stock simply to send a message to a gun company isn’t always possible, or even desirable.
Where Gun Stocks are Heading
The recent frenzied demand for guns has resulted in excellent growth for Smith & Wesson. But they aren’t the only ones benefiting. Cabelas Inc (NYSE:CAB), one of the nation’s leading gun retailers, has reported 9.2% greater sales for the third quarter over last year’s third quarter sales. Most investors expect the company to continue realizing significant growth based on current buyer behavior. The question that must be asked in light of such exponential growth is whether or not it’s sustainable. Can gun buyers continue to purchase at their current rate over the long term, or are we about to see the gun bubble burst?
The current market looks great for purchasing. Euphoric gun buying behavior continues to drive prices up, creating the perfect climate for investors. Keep in mind, however, that average gun buyers are in stocking up mode, purchasing guns and ammo at a heightened rate in light of the push for greater purchasing restrictions. That suggests that the growth we’re seeing now can’t be sustained for the long term. However, gun sales have consistently grown at a steady rate of between 4% and 5% since 1982, and it’s likely that we’ll still see steady (but slower) growth over time.