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Three Stocks Already Gaining From Election Year Politics


Ironically, gun producers and retailers perform better with a Democratic president in office, or poised to win.

Here's an odd indicator concerning the level of anxiety some Americans are feeling about the upcoming presidential election: Gun sales are way up.

Connecticut based Sturm, Ruger & Co. (RGR) released surprising news last Wednesday that it would suspend order requests after receiving 1 million firearm orders in the first three months alone of 2012. The company says its production capabilities simply cannot meet the demand. Comparatively, it produced nearly the same amount for the entierty of 2011, making 1.1 million guns. The company says it aims to restore normal operations at the end of May.

So, what's the cause for this surge in gun sales? Jim Barrett, an analyst from CL King & Associates, provides two reasons: President Obama and gun laws.

US citizens who disapprove of President Obama's performance and view his policies as a threat to the Second Amendment want to stock up on firearms -- namely pistols, revolvers, rifles, and shotguns -- in case guns laws become more stringent if he wins reelection this year. They reason that he will pursue tougher gun laws since he will have nothing to lose in his second term, even if he has not pursued such policies in his first term.

Historically, gun sales have done better under Democrats due to the real or imaginary view that they will curb Second Amendment rights. Former president of the National Rifle Association, the late Charlton Heston, provided a window into the minds of those who hold this opinion when he said, "I intend to dedicate my remaining time as president of the NRA to ensure the Second Amendment is safe from Al Gore and all those who threaten it."

Also, more states have recently enacted laws allowing the concealed carrying of a gun, which is also increasing demand for guns. Conceal-carry permits can be acquired in 49 states. Additionally, 21 states have "Stand Your Ground" laws (brought to national attention by the current Trayvon Martin case), which state that individuals do not have to retreat before using lethal force in self-defense, no longer making lethal force a person's last resort.

So what stocks are benefitting from the buying bonanza?

Smith & Wesson

Smith & Wesson (SWHC) manufactures handguns, revolvers, and rifles and security instruments, such as handcuffs and active barriers, for commercial, governmental, and military use. The company competes with Sturm, Ruger & Co. along with the private companies Glock and Taur. Despite the competition, Smith & Wesson's stock rose 11% on last week's news of Sturm, Ruger & Co.'s manufacturing cessation because they both serve the same clientele.

The strong commercial demand has made up for the slack caused by the cutbacks in military spending by the government, which only constituted a small portion of its overall business anyway. The company unloaded one of its unprofitable security businesses in October of last year, meaning the company will focus more on its already profitable commerical business.

In the third quarter of 2011, the company reported a 60% surge in firearm backlog valued at $198.5 million, or double the figure of a year earlier. Wedbush analyst Rommel Dionisio states that "such a substantial increase in order backlog is a positive leading indicator for near term sales momentum." In the beginning of this month, the company posted $98.1 million in sales for the third quarter, a 23.8% increase the previous year, and a third quarter profit that beat estimates for the fourth consecutive quarter. Its M&P handguns sold particularly well.

Sturm, Ruger & Co.

Like Smith & Wesson, Sturm, Ruger & Co. specializes in pistols, revolvers, and rifles. Unlike Smith & Wesson, it focuses primarily on these products and does not produce other security apparatuses.

Shares of the company have increased more than 10% since management announced a pause in gun production, bringing shares to their highest value since 1980. The company hasn't felt the negative pressures of the economic downturn, and it has benefited from the industry's growth since 2008 with the election of President Obama.


Firearm retailers are also reaping the rewards of strong demand for firearms, as demonstrated by Walmart's (WMT) experience when it began to sell firearms again in 2011. Walmart had removed firearms from most all but 1,300 of its stores in 2006. The company wanted to focus on higher-end products, but it admitted that the "appeal of guns may have been 'broader' than it thought."

Cabela's (CAB), a national retailer located in Sidney, Nebraska, that specializes in equipment for outdoor games and sports, has benefited from the increase in the purchase of hunting weapons. Cabela's Chief Merchandising Officer and Executive Vice President Brian J. Linneman said to analysts in a recent webcast that sales of "firearms and ammunition, certainly are on a rabid pace." Though, he does admit gun sales have hurt margins because guns and ammunitions are some of their low margin products, and the other products have not sold as well. The company has managed to increase the price of weapons with no backlash from customers to make up for the drop in demand of other products.

The company also has been opening new stores and has begun issuing the Cabela's CLUB Visa credit card. It recently opened its thirty-fifth store in Wichita, Kansas, drawing approximately 10,000 to 15,000 customers in a single day. Zacks has updated the rank of the company to a strong buy.

Can these stocks keep climbing?

It seems likely.

The National Shooting Sports Foundation stated earlier this year that last year was a "record-setting year" for the industry. It also said "potential exists for another strong sales year in 2012." So far, it has been correct. In addition to the news generated by Sturm, Roger & Co., the National Instant Criminal Background Check System reported that in January of this year 920,840 background checks were made for persons interested in purchasing firearms, a 17.3% increase from the same month last year. These background checks provide a good indicator for the demand of firearms, though this might overestimate or underestimate the number of gun sales. A person may buy multiple firearms after one background check, or a person may require multiple background checks for a single purchase. The NRA reported in 2011 that 300 million firearms were privately owned in the US with the ownership increasing by 4 million annually, one million of those firearms being handguns.
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