Terrorism. We certainly live in a fragile world, where a lone wolf or coordinated wackos can randomly attack and cause mayhem. And while the human cost are unquantifiable, especially to the families affected, the financial implications are easier defined.
Look at Orlando. On a beautiful Sunday morning in Florida we woke up to this horrendous news. How did the stock market react?
Well the Dow was down 0.6% from the open – trading over a 100 million shares. By end of trading on Wednesday it was down 190 points.
Now granted, what’s going on with oil prices and Europe had an effect on major indices like the Dow, but the market certainly reacted as one would expect. In the big scheme of things there wasn’t a lucrative opportunity in the broader markets.
And please don’t take the word ‘opportunity’ to mean something sinister as in a way to capitalize off of terrorism. But prudent investors are always weighing geopolitics, terrorism and global markets to make shrewd investment decisions.
The issue we’re discussing today, as it’s been widely discussed since Monday is guns – and in our case – profits from gun makers.
Predictably, there’s been a lot of discussion about our good old second amendment right to bear arms after the attack. Whether your pro guns or anti – doesn’t matter. What we’re looking at here is investments.
So… should we, as investors, be looking into major weapons stocks like Smith & Wesson (SWHC) and Sturm, Ruger & Co (RGR)?
Let’s look at some historical data about firearm sales – more telling – background checks for firearms.
If you looked at the calendar year for 2007 there were 11,177,336 background checks reported by the FBI’s NICS system.
In 2008 when Obama was first elected, citizens were worried about his gun policies and came out in force to get checked – that year 12,709,023 people were checked into the NICS system – a 14% increase.
From there each year the number of people have increased, with another surge in Obama’s reelection year of 2012 – 19,592,303 NICS checks. That’s a whopping 75% increase from 2007.
And annually the number has continued climbing – up to 23,141,970 last year! So from the year election year prior to Obama taking office until end of last year almost 12 million more Americans wanted to get the necessary background checks needed to purchase firearms.
That’s a lot of people looking to buy guns. Should bode well for companies like Smith & Wesson and Sturm, Ruger & Co.
Fast forward to today…
Like any industry there’s seasonal bumps and slumps – and the gun industry is no different. Typically from February through July of every year there’s a decline in background checks before picking back up the rest of the year.
So when you look at these stocks in the short-term you see them both hitting highs in Mid-March and since have fallen back. But that’s to be expected.
The year-over-year data still shows strength, which speaks to the upside of these stocks. In the first 5 months of 2016 compared to 2015 NICS checks are up 31% – most likely a reaction to upcoming election uncertainties. In fact there were more checks done in the first 5 months of this year than all of 2007!
Now, if you were waking up Monday morning and saw the news and thought about making a good short-term play with these gun makers you would be surprised at the results. Shareholders of both companies saw big jumps from Friday’s closing price to Monday’s open… but both stocks, as of this writing, are down from Monday’s opening price.
Smith & Wesson closed Friday at $21.41. In a furry of pre-market and market activity, which saw over 8 million shares traded (almost 4 times their average daily volume), SWHC opened at $23.40 and hit a high of $23.89. But from there it was all downhill. Shares of SWHC closed down over 2% (from opening bell) on Monday and dropped more than 8% by Wednesday’s closing bell.
Sturm, Ruger & Co (RGR) followed a similar path…
Shares in RGR soared from Friday’s closing price of $57.41 to open on Monday at $61.95… but by the closing bell on Wednesday – shares had fallen back down to 5%.
So now that the dust has settled what do we have…
Well if you did invest in either gun company at Monday’s open you’d be down a little but if you didn’t sell – you could have some good upside.
Both stocks are following a similar path in terms of technical data. Both experienced recent highs in March and have been trending down since – both having their shorter term 50 day Simple Moving Average (SMA) trending down towards the 200 day SMA. So technically they’re at a discount right now and closing in on being oversold.
So we could be at a bottom. And remember, shares of these companies are most likely down due to seasonal stats.
Analysts on both stocks have price targets higher – 33% upside expected on SWHC and 25% on RGR.
Between the SWHC and RGR – I’d go with Smith & Wesson. It has a cheaper entry price and higher upside – giving you both buying power and return on investment.
As to whether or not you should be guns or a gun stock? Well… let’s just say you can’t go wrong with either at this point. Protect your family and your wealth.
Regards,
Ethan Warrick
Editor
Wealth Authority
