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Gun and ammo sales have reached elevated levels after the recent Presidential election and comments by politicians on gun control. Add in Christmas and New Year's, and you have the perfect storm for guns and ammo sales.

In this article, we will first prove that gun, ammo, and accessory sales are up, and then show you how to profit from it.

Rising Tide Raises All Ships

If gun accessories are selling at a fast and furious clip, then we can surmise that guns and ammo are also selling at an elevated rate.

Brownells, a firearm accessories supplier, stated that it's:

experiencing "unprecedented" sales of [gun] magazines. Brownells has sold 3 1/2 year's worth of PMAG magazines in just 72 hours. It also says that it has sold "an even greater amount" of its own Brownells magazines

3 1/2 years of sales in just 72 hours! Amazing, to put it mildly. What goes in those magazines? In a word, ammo.

Ammo Situation

Right now, ammo is severely constrained in all major retail stores and online. Local checks by the author at multiple Academy Sports and Outdoors, (which is owned by (KKR), Walmart (WMT), and Dicks Sporting Goods (DKS) have all meet with the same feedback -- gun sales, especially of AR-type weapons and pistols, are highly elevated, with some places being sold out of AR-type weapons. Ammo is scarce for popular rounds such as 9mm, .40 cal, .223, and 7.62x39.

Online stores such as cheaperthandirt.com are also sold out on many popular rounds. We had to go all the way to the 9th product page to find 9mm in a 50 round box for sale!

24/7 Wall St writes:

Try calling Top Gun, Academy, Carter Country and other stores and you will get more or less the same answer: "We are sold out entirely, we have no idea when we are getting new stock in, and we have no idea what the pricing will be." Even the online sites that deal in guns and ammo are now low on inventory as sales have spiked.

Clearly, ammo is in high demand right now, and from our point of view, it has never been harder to find.

Gun Sales

Sales of guns in general are up but sales of AR-type weapons and pistols are extremely elevated. Prices for AR weapons are on average up 100%, and for magazines, prices are up 300%. The makers of these weapons should be able to raise prices to retail outlets and dealers in order to expand profit margins. Also, record background checks for firearms occurring in Colorado, Nevada, Tennessee, California and Virginia among other states further proves that sales are brisk.

John Hayes of the Pittsburgh Post-Gazette writes:

Last week gun sales were brisk throughout the Pittsburgh region and nationwide, straining the FBI's automated background check system for firearm purchases. One Pittsburgh retailer said days before the Christmas holiday shoppers were waiting as long as three days for FBI clearance to purchase a gun.

Reports from the Houston area indicate:

Gun buyers in Houston have bought up the entire inventory of AR guns. It is not just the guns. The ammunition is sold out. The magazines are sold out.

Having proved that gun and ammo sales are selling fast and furiously, how do we jump on this train? What stocks will be affected by this?

Investing in Retail

If we wanted to have exposure to an increase in gun and ammo sales but at the time some diversification into retail, we might consider investing in Cabela's (CAB). Cabela's operates as a specialty retailer and direct marketer of hunting, fishing, camping, and related outdoor merchandise. With 20% of Cabela's revenue coming from gun and ammo sales, the company stands to profit nicely. Getting additional inventory could be a problem, but Cabela's might get preferred shipments of merchandise as:

"Cabela's, which generates about a fifth of its $2.8 billion in revenue from firearms and ammunition, is offering to pay suppliers more quickly, 15 days in some cases, in hopes of becoming a favored destination for the limited inventory. It can take some retailers up to 120 days to pay gun and ammo manufacturers.

Looking at the numbers, we can see the PEG ratio is .92, which suggests the company is slightly undervalued. Cabela's does not pay a dividend.

Given that the company derives a fifth of his revenue from firearms and ammunition, it stands to reason that rising prices, along with gun and ammo sales, will be a positive catalyst to the company's future revenues. If gun bans do go into effect, Cabela's will not suffer financially. They will simply sell off the inventory and then restock with semi-automatic rifles and magazines.

Gun Pure Plays

For a riskier pure play, we can look at Smith & Wesson (SWHC). The company manufactures various weapons for civilians, military, and law enforcement.

The company sports a PEG ratio of a mere .36, suggesting it is very undervalued. Quarterly revenue growth is 48% with net income of $58.48 million. Profit margins stand at 11.16%, while cash is $57.96 million. Debt is $47.38 million. We would like to see this debt come down some, but we are not overly concerned about it at this point.

The stock had quite the run up recently to almost $11 per share, but has pulled back to the low $8's per share. During the last earnings call, some analysts were concerned that the company's backlog of sales was slightly down. This suggested that while sales were very good, they were going to slow down in the future. After recent events, this is no longer the case.

Also, the company announced a share buyback program on December 6th for $20 million. Since then, the company has used the full $20 million to repurchase stock, and today, Smith & Wesson announced the board of directors had authorized an additional $15 million share buyback. Insiders have made a few small purchases recently of Smith & Wesson stock.

Strum, Ruger & Co. Inc

Strum, Ruger & Co., aka Ruger (RGR), is also another firearms pure play.

Quarterly revenue growth is 46.80%, with net income at $61.36 million. Cash stands at $105.10 million, with $0 debt. Free cash flow is $42.07 million. Ruger will undoubtedly sell more weapons during this mania, and will see an increase in revenue and profits. Insiders have sold over $4 million dollars worth of stock in recent months.

Conclusion

The best way to play the increase in sales is to invest in Cabela's, or Smith & Wesson. Cabela's offers 20% exposure to the firearms market while offering diversification.

Smith & Wesson is a pure play that could do very well, yet if a gun ban goes into effect, it would have a negative effect on the company and obviously the stock would take a hit.

Strum, Ruger & Co. should benefit as well, and the cash position is very favorable. However, the insider selling raises doubts. We are going to take a cautious wait and see approach to Ruger and let it simmer for a little while before we decide to bite.

It should not take the public at large too long to put together the puzzle pieces and realize that the massive gun purchases will spell out increased revenues and profits for Cabela's and Smith & Wesson. We are bullish on both. Smith & Wesson looks like a winner.

Source: Investing In Guns: High-Caliber Options For Your 2013 Portfolio