Investors who follow gun manufacturers such as Smith and Wesson Holding Corp (NASDAQ: SWHC) and Sturm, Ruger & Co. Inc. (NYSE:RGR) may think that December's double-digit percentage decline was an exaggerated reaction to the announced effort on stricter gun control.
2013's rally in these stocks hints that investors may not be as concerned now that more is understood about the proposed gun legislation. On January 18th, The Motley Fool published the article, "Poll Shows Americans Want Stronger Gun Laws... Sort Of.” One of the main points in that article was that most Americans polled were not in support of an assault weapon ban or a high-capacity magazine ban for firearms, although there is a general consensus that background checks in relation to private party sales should be enforced at gun events. Here's what we had to say about this situation after the November Presidential Election.
With that said, legislation for assault weapon restriction could still move in either direction. This article questions if this legislation is really holding a proverbial gun to long-term investors' heads, and we can look at what some hedge funds doing with their Smith and Wesson and Sturm, Ruger & Co. holdings to get an idea of what bigger players in the market are doing.
Jim Simons’ hedge fund, Renaissance Technologies, has upped its stake in Smith and Wesson by 55% compared to the previous quarter. Simons reduced his Sturm, Ruger & Co. position by about 18%. This is likely just some profit taking on recent highs, however (see Simons’ entire 13F portfolio here). Route One Investment Company, meanwhile, is another major hedge fund that currently keeps 2.2% of its total funds in Smith and Wesson along with 1.34% in Sturm, Ruger and Co (see Route One’s other stock picks). That's a strong vote of confidence from two well-managed hedge funds.
Let’s get back to the crux of the situation. The estimated market cap for domestic non-military modern sporting rifles, the targeted style of gun in new legislation, represents approximately 18.7% of the total firearm market, and about 18.2% of Smith and Wesson's net sales. Rifles in general (modern sporting rifles and hunting rifles weren't distinguished in Sturm, Ruger & Co's 2011 financial statements) accounted for about 25% of total sales. It wouldn't be fair to say that all of this revenue would disappear for each company if a ban on assault rifles were implemented, though. Some of Smith and Wesson's revenues come from military and law enforcement sales, and the same can be said for Sturm, Ruger & Co.
Smith and Wesson's 2010 10-K states: "During the surge in consumer demand after the 2008 presidential election, modern sporting rifles represented the fastest growing segment of the long-gun market."
Investors can't be led to seriously believe that the big players investing in gun producers didn't see the immanency of an assault rifle ban coming, can they?