What's the first thing people do when they hear about major
shootings by a mentally unstable gunman? They go out and buy guns.
These shocking news events tend to spook people, so they instantly
take steps to ensure they don't fall victims to the next shooter.
As an example, gun sales in Arizona rose 60% on the day after
Congresswoman Gabrielle Giffords and others were shot on Jan. 8,
2011, according to the FBI's National Instant Criminal Background
Check System.
More broadly, gun sales have been above historical trends ever
since President Obama took office. Supporters of the Second
Amendment to the Constitution have suggested that the Obama
administration would make it much more difficult to acquire guns,
so they loaded up on firearms in advance of any tighter
measures.
Though tighter gun regulations never took effect, sales surely
benefited anyway. And for gun maker
Sturm Ruger (NYSE:
RGR
)
, it's been a boom time, asshares have risen roughly 1,000% since
late 2008. Indeed shares have risen a solid 30% since my colleague
Michael Vodicka
profiled the company in late June
.
Yet the road ahead for Sturm Ruger may prove to be much bumpier.
At least according to short sellers. They hold 7.8 million shares
in their accounts, which equates to a stunning 42% of the
stockfloat and represents roughly 19 days' worth of tradingvolume .
(Short data as of Sept. 14, 2012, which was released on Sept. 25,
2012.)
Why are the shorts making such a big bet? Well, a few key issues
come to mind.
The first is a matter of competition. As Sturm Ruger gained in
popularity with gun owners, rival
Smith & Wesson's (Nasdaq:
SWHC
)
fortunes seemed to wane. As a result, shares of Sturm Ruger rose
ever higher during much of President Obama's presidency, while
shares of Smith & Wesson slumped.
Yet as
I noted earlier this month
, Smith & Wesson appears to be back on track, delivering fiscal
first quarterearnings per share results that were more than 50%
ahead of forecasts. Management boosted forward guidance so sharply
that analysts now expect fiscal (April) 2013 sales to rise 30% to
$536 million.
In effect, Sturm Ruger can no longer count on a sleepy rival,
and short sellers may be predictingmarket share shifts ahead.
A saturatedmarket ?
An even bigger concern than relative market share is the total size
of the market. While conventional wisdom holds that another victory
for President Obama this fall will usher in another streak of
strong gun sales in 2013 and 2014, analysts aren't so sure. They
see both of these companies boosting sales at a very modest pace:
Sturm Ruger's sales are expected to grow just 0.4% to $459 million
in 2013. For Smith & Wesson, thefiscal year that begins next
May should also represent slowing growth, with sales rising just
4.5% to $561 million.
Why would gun sales slow even if a president who's seemingly
hostile to the gun lobby is re-elected? Because many gun owners may
have all the firearms they need. Guns don't wear out quickly, so
this isn't an industry that benefits from a replacement cycle.
Short sellers may be signaling that gun sales may not just be
flattening in the years to come, but poised to move lower as gun
owners decide they are already amply protected against the next
mentally unstable shooter making the headlines.
Risks to Consider:
As an upside risk for short sellers, a certain segment of gun
owners say the Obama Administration will seek to comply with a
United Nation's push to tighten gun control law,
as this piece from NPR
notes. So any headlines along those lines could lead to another
spike in gun sales.
Action to Take -->
It's increasingly questionable whether a re-election of President
Obama will presage another spike in gun sales. A victory by Mitt
Romney, which looks less likely at the moment, would surely remove
the impetus for fears of Second Amendment infringement. The
firearms sector has had a great run, augmented by the fact that
Smith & Wesson is regaining a bigger slice of the market. And
that's precisely why short sellers are betting that Sturm Ruger's
best days have already passed.
-- David Sterman
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David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.