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How Upholding Bloomberg's Sugary-Drink Ban Could Impact Gun Stocks


A look at the parallels between New York Mayor Michael Bloomberg's sugary-drink ban and efforts to ban specific assault-style weapons -- and how it could affect trading in gun manufacturers.

There are always differences, but has anyone noticed the similarities between banning only some drinks and only some guns? There are certain parallels between New York Mayor Michael Bloomberg's sugary-drink ban and efforts to ban specific assault-style weapons, but not others.

I have tried to leave all politics aside in writing the following analysis. I would ask that readers apply the same objectivity.

It should not be surprising that a judgment at some point along the line was going to threaten, delay, or derail Bloomberg's ban. Justice Milton Tingling disagreed with Bloomberg's proposal because it "excludes[s] other beverages that have significantly higher concentrations of sugar sweeteners and calories." In other words, the plan contradicts itself. Meanwhile, a recently discovered Department of Justice memo regarding gun control states essentially the same thing. "Prior to the 1994 ban, assault weapons were used in 2-8% of crimes. Therefore a complete elimination of assault weapons would not have a large impact on gun homicides."

Again, this analysis is not about backing or deriding either effort. It is about extrapolating from the similar criticisms against them to anticipate how the drink ban's future headlines could affect trading in gun manufacturers Sturm, Ruger & Co.(NYSE:RGR) and Smith & Wesson (NASDAQ:SWHC).

Handicapping an appeal's outcome can be dangerous business. Appeals that are heard tend not to be clear-cut. As an example, Judge John Roberts was the last person whom anyone assumed would endorse "Obamacare," yet his opinion upheld it (by contradicting part of it, no less). Tingling's opinion has its own difficulties.

Various decisions will be made by various courts on the sugary drink ban, as Bloomberg's deep pockets ensure he will get his days in court. If the ban were to survive, it could suggest that courts are similarly open to more gun control legislation. Perhaps more open, since a loaded 32 is somewhat more dangerous than a 32-ounce Coke.

The various decisions' effect on RGR and SWHC will probably be a one-way street. Decisions against the drink ban will always be subject to appeal, which should limit positive reactions in gun manufacturers' stocks. They are probably exposed only to the downside risks of each possible ruling against Tingling, favoring a limited drink ban. Courts that endorse more governmental intervention to protect people from their own unhealthy choices are likely also to protect people against deadly choices made by others.

I last reviewed RGR and SWHC in the wake of Connecticut's tragedy. Heightened, renewed gun control rhetoric had driven down the sector's prices, gun retailers Cabelas (Nbig-drink-ban-bloombergYSE:CAB) and Wal-Mart (NYSE:WMT) along with them. Patterns, technicals and price projections had indicated their drops would be temporary, short-lived, and recovered. Bottoms were a little briefer than expected, as prior lows held as support amid high-volume washouts. Their recoveries back to or toward prior highs now have very limited pullback tolerance.

Advocates of tighter gun restrictions are hopeful, while few political observers expect new legislation to only inhibit gun ownership, if that. Underscoring the latter, RGR and SWHC seem barely to have noticed last week that a Senate Judiciary Committee approved an assault weapons ban. Perhaps they'll react positively if/when a vote on the legislation fails.

But RGR and SWHC patterns can't wait too long from now before extending further into new high territory -- earnings outlook statements would be very helpful here. Delaying more of a rally would be vulnerable to at least another corrective dip, while waiting for a gun ban vote to fail. Meanwhile, the catalyst for another dip might might be Bloomberg's drink ban winning on its first appeal. Upholding the Tingling ruling, however, might not make an impact.
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No positions in stocks mentioned.
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