Date: 6/21/2022
Author: Mr. X
The Supreme Court dropped a political bomb in a 6-3 ruling that found a New York state law was unconstitutional. The law required concealed carry holders to demonstrate a particular need before they were allowed to carry a gun. “We know of no other constitutional right than an individual may exercise only after demonstrating to government officers some special need,” wrote Justice Clarence Thomas in the majority opinion.
At the same time, the first major bipartisan gun control measure in many years passed in the Senate. Minority Leader Mitch McConnell (R-KY) and 14 other Republicans voted with the Democrats on a measure that restricted firearms ownership to those under 21. The legislation also funded so-called “red flag laws,” which allow law enforcement to temporarily seize weapons from individuals judged dangerous. There are obviously major emotions on both sides of this debate.
Yet it’s because there are emotions coming from both sides that gun stocks may see an unexpected boom. The Supreme Court’s decision firmly established the individual right to own a gun as something fundamental, which can’t be taken away even in a progressive state. This essentially opens the market for handgun owners in California, New York, and other states.
Move Fast – Keep Winning
Click here to learn more!
New York Governor Kathy Hochul has already blasted the decision and will push for future legislation. California Governor Gavin Newsom, a possible Democratic presidential contender if Joe Biden doesn’t run for re-election, also vocally condemned it. They have public opinion in their states on their side, but it doesn’t matter.
The legislation may do just enough to drive a round of fear-buying but not enough to actually change America’s gun culture. Thanks to the Supreme Court, that gun culture also got a practical guarantee of medium-term survival. (If you think an entire company/industry can’t just be wiped out overnight, talk to Juul Inc., which is facing ruin now that the FDA has told it to shut down operations due to health concerns.)
It’s important not to be confused by the politics, policies or even morality here. It’s a technical question – no different than analyzing a trade with a tobacco company that might stand to gain with vaping being banned or a weapons manufacturer that benefits from war in Ukraine. The best case scenario for the gun companies are laws and media coverage that drive people to buy. At the same time, there can’t be any new restrictions that could actually cut into purchases.
That appears to be what we are facing.
Smith & Wesson Brands [SWBI] rose by more than 9.6% during the trading day.
Ammo Inc [POWW] was up more than 4.2%.
Both of the above are in the RID Model Portfolio. While the former fell in after-hours trading, the latter actually gained further ground.
Sturm Ruger & Company Inc [RGR] gained 4.3% and picked up further ground in after-hours trading.
Vista Outdoor Inc [VSTO] gained 2.92%.
American Outdoor Brands Inc [AOUT] gained more than 10%.
What’s interesting about gun companies is that they remain at relatively sane valuations, with low P/E ratios (remember how quaint those sound) compared to tech stocks, even as the recent tech collapse. POWW is just over 15, AOUT is just over 10, SWBI is under 3, which sounds frankly insane. These are all after yesterday’s gains.
Gun and ammunition companies are also coming off record sales in recent years. Americans bought about 18.5 million guns in 2021. The year with the most guns sold was 2020, in which about 12% more firearms were sold. More than 20% of those who bought guns that year were first-time buyers. These customers represent a lasting investment for the sector, with many going on to buy more guns and ammunition. They might also become more politically involved to protect their gun rights.
Of course, that’s the catch for firearms isn’t it? Any sector that rises or falls so definitively because of politics and legal decisions is inherently unstable. If yesterday’s decision had allowed for large scale restrictions on concealed carry, companies like SWBI would face a lasting market decline.
It may be tempting to believe that the Supreme Court settled the question yesterday and that the sector is secure. However, polls show that the Supreme Court is losing legitimacy in the eyes of many Americans, and one could easily imagine extreme tactics such as expanding the court or impeaching justices becoming normalized. When so few justices hold so much power, a conservative “majority” can shift quickly.
More importantly, gun control organizations seeking to harm the sector may be switching to a more effective strategy – lawsuits against gun companies. Individuals, states, and even other countries are suing various gun companies. Thirteen states (and Washington DC) are supporting a lawsuit by the Mexican government, accusing some companies of facilitating weapons trafficking.
It’s this effort that prevents one from whole-heartedly endorsing the sector for the long-term. Yesterday’s ruling may force advocacy groups and liberal states into pursuing these kinds of strategies. Lawsuit by lawsuit, regulation by regulation, the space in which companies must operate can be gradually restricted. Even if an abstract right to gun ownership is protecting by the Constitution, that’s no guarantee against deliberately destructive regulation.
We’re probably heading into a recession, and value stocks will be just as important as buying the dip in tomorrow’s growth stocks. Gun companies may look attractive, but they are uniquely vulnerable. While they are definitely worth considering at these prices, investors thinking in terms of decades should not assume they will avoid the fate of tobacco companies.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
