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Rising concern over increased regulation from the Obama White House has gun buffs stocking up on the latest tactical rifles and pistols. This helps the fortunes of gun makers Smith & Wesson (SWHC) and Ruger (RGR) as well as specialty retailer Cabela's (CAB), which specializes in firearms and hunting gear.
Ruger reported Tuesday that gun sales increased 81% in the fourth quarter on new products and "robust firearms demand." Its order backlog now stands at $48 million. Smith & Wesson plans to double revenue within the next three years and reported increased sales from "speculation on the outcome of the presidential election." Cabela's reported that same-store sales rose 2.2% over the holiday election season -- a time of great distress for other retailers.
With that kind of performance, it's not surprising investors are flocking to these names. Over the last week, while the S&P 500 is down 2%, Smith & Wesson is up 56%, Cabela's has gained 35%, and Rugers added 44%.
Based on my conversation with Wedbush Morgan analyst Rommel Dionisio, much of the sales increase has been in self-defense firearms like military-type semi-automatics or pistols. Sales of traditional bolt-action hunting rifles and shotguns remain steady. Cabela's spokesman Joe Arterburn notes that many of these customers are first-time buyers who "have never had a handgun in their home but believe now ... is a good time to buy them." In other words, people aren't looking to hunt deer; they're worried about other people.
The question, of course, is whether this performance will continue or will end up being a brief, post-election buying binge. According to the FBI, background checks on potential gun buyers increased 29% last month over the same period in 2007. Although Obama has always played down the gun rights issue, many seize on his off-the-cuff remarks last year that people "cling to guns and religion" during times of economic stress. For the record, he has tried to soothe jumpy nerves: "I believe in common sense gun safety law, and I believe in the second amendment. And so, lawful gun owners have nothing to fear."
Nevertheless, as the economic picture darkens, it's more than possible people will stop fearing our new president and start worrying about a Mad Max-like apocalyptic scenario. Just look the huge increase in the popularity of physical gold. Sales of the popular American Eagle gold coin are up four-fold while commodity investors are increasingly opting for physical delivery of gold bullion instead of settling futures contracts in cash. Bankers are reporting that more clients are hoarding gold in their vaults.
Sure, this is crazy. But remember that humans aren't rational and that fear is the strongest of all emotions. Forget traditional defensive sectors like utilities and healthcare. Go with guns and gold.
Update: Attorney General Eric Holder told reporters Wednesday that President Obama would like to "reinstitute the ban on the sale of assault weapons" that expired in 2004 under the Bush administration. Holder said the ban would not only be a "positive move" by the United States, but would help reduce the trafficking of guns to the drug cartels in Mexico. It looks like the gun boom is far from over.
Image credit: jeroen020
Disclosure: The author does not own or control shares in any of the companies mentioned.
Anthony Mirhaydari is a contributor to the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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