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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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Instead, both stocks fell, and have continued to fall. As of December 18, Sturm Ruger had lost 7.8%, while Smith & Wesson was down 9.3%. In July, despite the flurry of shootings that culminated in the rampage within the Colorado movie theater, the market seemed to ascribe little probability to the prospect of that tragedy providing a political impetus for tougher gun laws. This time, either market participants believe that the Newton, Connecticut, murders will cause a drop in demand for weapons or that there is a long-term and serious threat to the gun manufacturing business as it exists today. This time, the market clearly believes that something is different, and it goes beyond the political rhetoric.

Even that rhetoric has become more pointed, though, with President Obama – no longer fighting for re-election – pledging to use "whatever power this office holds" to prevent further such tragedies. Some pro-gun legislators, like Democratic Sen. Joe Manchin of West Virginia, have shown signs of being willing to debate the issue. And in another sign that it's different this time, the National Rifle Association took down its Facebook page over the weekend, after announcing the day before the Newton shooting that it had 1.7 million "likes," and urging fans to "keep the momentum going."

Those wanting to own guns may still respond to President Obama's call for measures to reduce gun violence by acquiring more weapons before any changes to the laws makes doing so more difficult. In the short run, that may cause another boost in the gun manufacturers' order backlogs of the kind that helped ignite their recent big market rally. That would be good news for Smith & Wesson, which recently disclosed to investors that while demand by dealers for its handguns was still higher than it was a year ago at this time, it had fallen over the third quarter. At least, it may be good news for the company's profits, and for those at Sturm Ruger.

But this time, investors appear to be looking past any short-term upside and into the middle distance, and seeing a new kind of business environment emerge for them and for companies like Alliant Techsystems (NYSE:ATK), which makes ammunition for individual gun owners, among its other businesses. Alliant's stock price has held up well in the wake of the shootings, possibly because it is primarily a defense contractor that also supplies ammunition to police forces; the impact of its lower-margin non-military sales of ammunition is muted when set beside revenues from missile systems.

Financial markets are a relatively unbiased way to gauge what pragmatic, profit-oriented people expect to happen to a company next. They're far from infallible, of course, and in times of panic can become distorted and begin sending unreliable signals. Still, the fact that the two publicly-traded gun manufacturers in the United States saw their shares decline for a second day running – after investors had a weekend to digest the news and the emotion associated with it – is a signal that the markets, too, believe something has changed.
No positions in stocks mentioned.
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