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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.

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.

These are all early readings, however. Outraged presidents have vowed "never again" in the wake of mass murders – remember Columbine? The murders on the Long Island Rail Road? They wound up reluctant to deploy their political capital by pushing for significant reforms. And, as I noted back in the summer, trying to push through effective new laws would make the debate over Obamacare look like a walk in the park.

For the coming weeks and months, until it becomes clear whether this is just a more intense and acute response to these all-too-frequent bouts of gun violence that have claimed the lives of all too many American citizens in recent decades, gun manufacturing stocks are likely to remain under pressure. As the nation's mood has shifted dramatically to one extreme, it won't be until the emotion dissipates that we'll be able to judge what lies ahead for Sturm Ruger and Smith & Wesson. And even then, last week's tragedy has made owning them a higher-risk proposition.

Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

For more from The Fiscal Times:


Gun Industry Has Boomed During Obama Years

Boehner's Plan 'B' Gives GOP Leverage on Tax Hikes

The Alarming Corruption of the Think Tanks


Follow The Fiscal Times on Twitter @TheFiscalTimes.
No positions in stocks mentioned.
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