No meaningful regulation is coming
In a previous piece, I predicted that attempts at restricting gun sales would fail. With Wednesday’s events, that seems ever more likely.
The Manchin-Toomey amendment was weaker than other proposals, most notably, Sen. Diane Feinstein’s drive to restrict sales of assault weapons. If it had passed, the amendment would have expanded the process of background checks on gun purchasers, but had a number of major loopholes: most notably, sales to “friends” would not be subject to background checks.
President Obama has pledged to continue
That said, Obama has vowed to keep fighting. In a passionate speech delivered shortly after the amendment failed to pass, Obama pledged that it was merely “round one” in the ongoing debate.
Yet, if such a watered-down amendment like Manchin-Toomey is incapable of passing a Democratically-controlled Senate (nevermind a Republican House), how can anyone expect meaningful future gun control legislation?
At the same time, Obama’s unwillingness to abandon the issue should keep the fear of coming legislation in the minds’ of the gun-buying public. Obama’s decision to keep pushing for restrictions — restrictions that will never come — will only continue to fuel the gun-purchasing frenzy.
The case for gun stocks
Gunmakers Sturm, Ruger & Company (NYSE:RGR) and Smith & Wesson Holding Corporation (NASDAQ:SWHC) are both fairly heavily shorted. As of the last report, roughly 27% of Sturm, Ruger’s shares have been bet against, while 22% of Smith & Wesson’s have been sold short.
Many of these short sellers may be banking on regulation coming to derail these companies’ business models. If that’s the case, they’ll be forced to cover in the coming months when both companies continue to post solid sales.
Cabelas Inc (NYSE:CAB)’s is less linked to guns, but as a major gun retailer, the company has a great deal of exposure. After the Sandy Hook shooting, shares of Cabela’s dropped from the mid $40s to near $39.
How I could be wrong
Currently, I’m long both Sturm, Ruger and Smith & Wesson Holding Corporation (NASDAQ:SWHC). I plan to hold my shares until the short interest on both drops below 15%. I believe that both companies will continue to report solid quarters for the remainder of the year, which should scare shorts into covering.
But I don’t wish to play Warren Buffett with my gun investment. The problem with guns from a sales perspective is that they last — a very, very long time. A gun that is taken care of is an extremely durable good, and can easily outlive its owner.
At some point, the gun market will become fully saturated and sales will drop. When that happens, gun stocks will inevitably decline. But I don’t expect that to occur while gun control still remains in the headlines.
The article Now That Gun Control Has Failed, It’s Time to Buy Gun Stocks originally appeared on Fool.com is written by Salvatore “Sam” Mattera.
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