Gun Stocks Waiting for the Legislative Hammer to Drop

Those of us who are purists about the Second Amendment knew it was coming under President Obama sooner or later, but now the reality has hit with the force of an armor-piercing .50 caliber round.

I am referring here to the prospect — indeed the likelihood — of additional federal gun control imposed on all law-abiding citizens.

During the past two days, the process to further erode the Bill of Rights is under way, and the latest charge is being led by Vice President Biden. A long-time champion of restricting the freedom to keep and bear arms, Biden has been tasked with making recommendations to President Obama about what any new federal gun legislation will encompass.

On Wednesday, the vice president met with representatives from gun-safety groups, survivors of gun violence and relatives of gun violence victims. In that meeting, Biden proclaimed gun violence in the United States “is a problem that requires immediate attention” and the administration has determined “executive action can be taken.” This latter statement suggests President Obama is prepared to use executive orders to impose more laws on gun owners if Congress fails to act in a manner that comports with the president’s views.

Not surprisingly, the threat of a Constitutional end-around on guns has caused a lot of eyebrows to be raised among gun rights proponents. It’s also caused a lot of selling on Wall Street in firearms and related stocks.

In Thursday’s trading, the stock of Smith & Wesson Holding Corp. (NASDAQ: SWHC) stock fell more than 4% by midday before closing down 3.62%. That plunge has pushed shares of the company down nearly 9% over the past month. I suspect that any kind of ramped-up firearms ban would hurt Smith & Wesson sales more than any other publicly traded gun maker, and that’s because the company recently placed a renewed emphasis on its M&P line of tactical, military-style modern sporting rifles.

The M&P rifles closely resemble the Bushmaster semi-automatic rifle that was used in the horrific murders of 26 people, including 20 children ages 6 and 7, at the Sandy Hook Elementary School in Newtown, Conn., in December.

That other publicly traded firearms maker is Sturm Ruger & Co. (NYSE: RGR), and midway through Thursday trade, RGR shares fell 2.4% before the stock closed for the day down 1.8%. Selling in RGR hasn’t been as robust as it has been in SWHC shares, quite likely due to the fact that Sturm Ruger specializes in personal defense handguns such as semi-automatic pistols and revolvers. It also sells a lot of small caliber rifles used for target shooting and small game hunting. Any new legislation on firearms likely will be much gentler on the kind of guns Sturm Ruger sells.

A look here at the chart of RGR shows that, after a December decline that sent the stock below its 200-day moving average, shares have come back strong. RGR now trades back above both its 200-day average and its 50-day moving averages.

Of course, there are other companies likely to be affected by new gun laws. These companies are in the retail space, and they include firearms, ammunition and outdoorsmen products retailer Cabela’s (NYSE: CAB). They also include guns and ammo retailer Dick’s Sporting Goods (NYSE: DKS), and then there’s the world’s largest retailer, Walmart (NYSE: WMT), which also happens to be the largest firearms retailer in the United States.

In today’s meeting on the issue, Vice President Biden and Attorney General Eric Holder will speak with representatives from the National Rifle Association, as well as representatives from Cabela’s, Dick’s and Walmart, to discuss their respective roles in determining what new legislation and/or gun restrictions will be imposed on Americans. Whatever comes out of the Biden meetings, I think it’s safe to say that for the most part, new laws will not be a positive for any of the companies in the gun space.

If you’ve owned gun stocks during the past year, now is the right time to lock in profits. Ask yourself this: How long can the sustained uptrend last now that a commitment has been made by the administration to do what it feels is necessary to curb gun violence?

The need to “do something” on the part of politicians is reason for anyone with gains in the sector to protect those profits and step aside. If you’re not invested in the space, then I say wait until there’s some clarity about any new gun laws before taking any new positions in the firearms space. This way, when the legislative hammer drops on gun stocks, at least you won’t have to handle the misfire.

Follow Jim on Twitter: @Woodsish.