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Is Sandy Hook What It Takes to Hurt Gun Stocks?

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In the wake of the school shooting in Connecticut, companies are finally unloading their firearms.

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Maybe it really is different this time. The level of outrage at the latest mass shooting has a different, more intense tone to it. Perhaps that's because of the victims – particularly the 20 six- and seven-year-olds and six of their teachers. Or the timing. Or the fact that this is the seventh attack of its kind this year alone.

Perhaps it's even because of the location, a school, which underscores the increasing sense of vulnerability felt by Americans simply trying to go about their ordinary lives, and which joins a list from recent years as long and varied as an IHOP restaurant, a college campus, a movie theater, a beauty salon, a church, a Sikh temple, and a meet-and-greet session with a member of Congress on an Arizona street corner.

Another very convincing sign that it's different this time is the fact that Cerberus Capital, a private equity company, announced that will immediately take steps to sell its stake in Freedom Group, a gun and ammunition manufacturer. Although the company says that "it is not our role to take positions, or attempt to shape or influence the gun control policy debate," the mere fact that it has responded to events by taking such dramatic action is telling. Either Cerberus believes that its investors no longer will accept earnings from gun manufacturers, fears that regulations will wreak havoc on the business or worries that its stake in Freedom will damage its own public image beyond repair. Clearly, however, this isn't a purely commercial decision. While declaring that it doesn't believe Freedom has any liability in terms of how it sells the weapons it manufactures (they are sold to dealers; Cerberus makes it clear that it doesn't believe any single company can prevent such tragedies), the private equity investment firm added that "it is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level."

The differences this time have also extended to publicly traded gun companies. When I wrote about gun stocks in the wake of the Aurora, Colorado, movie theater shooting in July, both Smith & Wesson Holding Corp. (NASDAQ:SWHC) and Sturm, Ruger & Co. (NYSE:RGR) had seen their share prices gain ground since the massacre. Sturm Ruger's shares gained 2.7% in the days following that attack, to trade at about $43.72. Smith & Wesson, meanwhile, rose somewhat more modestly to about $9.65 per share. Both went on to post further gains over the summer before hitting their 52-week peaks or coming close to them in the early days of December. At that point, the two gun manufacturers clearly ranked among the best-performing stocks for the year, with Sturm Ruger having risen about 136% and Smith & Wesson recording a gain of 71.6%, compared to an 11% advance for the S&P 500.

After the Newtown shootings, investors might have anticipated another "Obama Factor" boom as gun owners added to their arsenals ahead of a potential crackdown. Or they might have bid up the gunmakers after surveying the political landscape and concluding there was no reason to believe that any real crackdown would come.
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