A 2016 Elections Investment

 |  Includes: RGR, SWHC
by: Ugly Duckling


Currently, Hillary Clinton leads every Republican contender by about 10% in the polls.

Clinton is an outspoken advocate of tighter gun control.

History has show consistent sales surges in gun sales during election years, especially when Democrats are favored.

Gun Control Debate Drives Gun Sales

Advocates of stricter gun control find themselves in a bind. Mere public discourse on gun laws and background checks have the immediate effect of driving stronger gun sales. In fact, the strongest periods of gun sales on record have been during Democratic election years and after high-publicity shootings according to FBI data (data collected is on background checks which is a reliable predictor for gun sales).

Low Legislative Risk

Currently, the strongest push by gun control advocates is for stronger background checks. Background checks are much easier to push through the legislative process with out constitutional Second Amendment cases than any sort of weapons ban. Even should legislation mandating further background checks be established, as virtually all gun purchases in the primary market are by legal purchasers, background checks should not impact gun sales in a meaningful way. Gun registry legislation is also not a major threat to gun sales for the same reason. The sheer number of unregistered guns currently in circulation in the United States, about 270 million as of 2007, is more than enough to sustain criminal networks' demand for the next few centuries. Meanwhile, law-abiding owners will continue to purchase guns in legal fashions, regardless of impediments placed before them.

Clinton On Guns

All of the available recent polls show Hillary Clinton (should she run and be nominated, wink wink) as the frontrunner against any potential Republican candidate. While elections are still quite far away, these polls demonstrate a considerable Democratic lead in the impending race. What's important to note is that fear of election of a Democrat and not the election itself drives the sales of firearms.

For Hillary's stance on gun control one need not look further than the NRA website. The organisation which promotes firearms ownership gives a laundry list of positions espoused by the potential candidate. While her stance may be negative for gun enthusiasts, its definitely great for the gun companies.

How To Play It

Currently there are two available pure-plays on gun sales. Both companies have experienced soften of sales in 2014 and stand to gain significantly in gun control chatter upticks. According to Google Trends, talk of gun control doubles from its baseline in election years, and spikes during shooting incidents.Click to enlarge

The two companies that stand to gain are Ruger (NYSE:RGR) and Smith & Wesson (NASDAQ:SWHC). Both companies manufacture quality firearms and trade at P/E multiples of under 10. In addition, both companies have recently come out of stronger R&D cycles and should see expenses decline and free cash flow strengthen. Investors looking for a dividend may choose to look towards Ruger which pays a variable dividend on a quarterly basis. On the other hand, Smith & Wesson appears to be cheaper on a pure value basis and sports impressive margins and excellent growth prospects. Either company is attractive at current valuations and the coming election should push sales higher for the two companies.

Disclosure: The author is long SWHC.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.