How Hedge Funds Traded Firearms Stocks in Q2

With the U.S. election rapidly approaching, investor interest in firearm stocks is arguably higher than it has been in a long time. If Hillary Clinton should win come November, existing gun-laws might be tightened, while the opposite will likely happen if Donald Trump becomes the next President. In either case, firearm stocks will likely move in one direction or another on the news.

Given the impending catalyst ahead, Insider Monkey has put together a list of some of the smart money’s favorite firearm stocks. Without further elaboration, let’s analyze Sturm, Ruger & Company (NYSE:RGR), Vista Outdoor Inc (NYSE:VSTO), Smith & Wesson Holding Corp (NASDAQ:SWHC), TASER International, Inc. (NASDAQ:TASR), and Cabelas Inc (NYSE:CAB) and the associated hedge fund movement in the five stocks during the second quarter.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).

#5 TASER International, Inc. (NASDAQ:TASR)

– Number of Hedge Fund Shareholders (as of June 30): 10
– Total Value of Hedge Funds’ Holdings (as of June 30): $54.85 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 4.20%

As a whole, hedge funds weren’t as enthusiastic about TASER International, Inc. (NASDAQ:TASR) as they were on some of the other firearms stocks on our list. According to our data culled from 749 hedge funds that filed 13Fs for the latest quarter, ten owned shares of TASER at the end of the second quarter, down by one from the previous quarter. Collectively, those funds’ share ownership accounted for 4.2% of the float at the end of June, compared to nearly 18% of the float that is on borrow by bearish investors as of the most recent short reporting period. One reason for the skepticism could be Taser’s rather high forward P/E of 57.75. Richard Driehaus‘ Driehaus Capital raised its stake in TASER by 152% during the June quarter, to just under 300,000 shares.

#4 Sturm, Ruger & Company (NYSE:RGR)

– Number of Hedge Fund Shareholders (as of June 30): 16
– Total Value of Hedge Funds’ Holdings (as of June 30): $76.39 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 6.30%

Hedge funds were cautiously optimistic on Sturm, Ruger & Company (NYSE:RGR) from April 1 to June 30, as the number of funds that we track with holdings in the company fell stood at 16 at the end of June, down by one over the quarter. The gun manufacturer reported solid second quarter earnings of $1.22 per share on sales of $167.94 million. Analysts were expecting $0.07 per share and $3.64 million less, respectively. Revenue rose by 19.2% year-over-year, driven by strong demand for new firearms. Sturm, Ruger & Company currently pays an annual dividend of $1.96 per share, good for a 3.39% yield.

Hedge funds’ three favorite firearms stocks are revealed and discussed on the next page.

#3 Smith & Wesson Holding Corp (NASDAQ:SWHC)

– Number of Hedge Fund Shareholders (as of June 30): 20
– Total Value of Hedge Funds’ Holdings (as of June 30): $136.89 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 9.00%

Like the previously-mentioned firearms stocks on our list, more smart money funds sold out of Smith & Wesson Holding Corp (NASDAQ:SWHC) in the second quarter than the number of funds that bought in. According to our database, 20 funds were long Smith & Wesson Holding Corp at the end of June, versus 24 at the end of March. Those 20 funds held more valuable positions in Smith & Wesson on June 30 in aggregate than the 24 did on March 31 however, as they held $136.89 million worth of Smith & Wesson shares at the end of June versus $121.78 million worth of holdings on March 31. Among the funds that raised their stakes was Robert B. Gillam‘s McKinley Capital Management, which bumped up its holding in the stock by 62% during the second quarter, to 295,974 shares.

#2 Vista Outdoor Inc (NYSE:VSTO)

– Number of Hedge Fund Shareholders (as of June 30): 27
– Total Value of Hedge Funds’ Holdings (as of June 30): $631.08 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 21.80%

In contrast to the less popular firearms stocks, Vista Outdoor gained popularity among the smart money set in the second quarter in terms of the total number of shareholders of the stock. 27 institutions that we track were long Vista Outdoor Inc (NYSE:VSTO) at the end of the second quarter, up by four quarter-over-quarter. Like the smart money, analysts also like Vista Outdoor. Of the seven analysts covering the stock, five have ‘Buy’ ratings on it, while two have ‘Hold’ ratings, and none have ‘Sell’ ratings. Among the more recent analyst commentary, KeyCorp set a $48 price target on it and raised its rating to ‘Overweight’ from ‘Sector Weight’. Given that Vista Outdoor sells other things besides guns and ammo, the company benefits more from the strong U.S. economy.

#1 Cabelas Inc (NYSE:CAB)

– Number of Hedge Fund Shareholders (as of June 30): 27
– Total Value of Hedge Funds’ Holdings (as of June 30): $661.42 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 19.40%

With 27 hedge fund holders among those in our database, up by four from the previous quarter, Cabelas Inc (NYSE:CAB) is the most popular firearms-related stock on our list (Cabelas sells firearms among other things). Given all the media attention around the subject, some of the funds were undoubtedly long Cabelas due to the company’s potential to merge with Bass Pro Shops. The two companies would be able to unlock substantial synergies if a merger between them occurred. So far, however, nothing concrete has materialized. Ken Fisher‘s Fisher Asset Management owned around 1.00 million Cabelas shares on June 30.

Disclosure: None