Similar to alcohol and tobacco stocks that I wrote about in the first part of this series, gun stocks get a bad rap. Many investors equate buying a gun stock to financing crime and murder. Nevertheless, the combination of a weak economy, rising crime rates, and a fear of gun control legislation has had gun sales rise consistently since late 2008. Sales jumped 15% in March 2011 alone, so there is some momentum (albeit some fear driven) in this industry.
However, is there enough money to be made in firearms to pile up your portfolio? In this article, I break down three of the leading firearms dealers that are publicly traded.
Olin Corporation (OLN) - Olin is not a pure play on firearms, but 37% of their revenue comes from selling guns and ammunition from their famous brand of Winchester rifles. In addition to gun sales, the rest of their revenue comes from selling chlorine and alkaline products. The company is trading at a value with 10 P/E and a 3.83% dividend yield, but buying Olin is more of a chemical play than profiting off of gun sales. For chemical companies, I would recommend Lyondell Basel (LYB) instead.
Smith and Wesson Holdings (SWHC) - Smith and Wesson is America's leading hand gun producer and sales have been up by an average of 26% over the past five years. However, SHWC has not been able to translate these gains into shareholder value. The stock has declined precipitously to below $4 per share and losses have surpassed $79 million (about $1.32 per share). Many of these losses have been driven by acquisitions, but these purchases have not added much value. I would stay away from this stock until the company reaches profitability or maybe buy it a few days before the 2012 election for an event driven trade.
Strum and Ruger Company Inc. (RGR) - Ruger is another leading gun company that dominates the market for semi-automatic rifles and pistols. Ruger is more a speculative small cap investment compared to the previously listed companies, yet has much better financial health. The company has no debt, a return on investment of 22%, and earnings have more than doubled on average over the past five years (2009 was a big year that skewed the average). However, they are more subject to regulatory risk as semi-automatic weapons have been targets for bans by gun control advocates.
Overall, the gun industry seems to be booming right now. I expect this trend to continue until unemployment significantly lowers as desperation of poor Americans may lead to higher crime and a need to buy guns by more fortunate citizens to protect themselves. Ruger seems to be the best bet of the field, but I would not buy any gun companies at this time, due to financial and regulatory risks that these companies incur. Shorting does not seem to be a good idea either because sales are skyrocketing even if it does not translate to earnings. For sin stocks, investors are better off with buying the tobacco and alcohol names I have mentioned previously.