Smith And Wesson; Elections Have Consequences

Includes: AOBC
by: Robert Wagner


Gun manufactures' sales are surging.

Motivation to buy guns and ammo will be materially impacted by the upcoming election.

A Republican victory taking the Senate would likely send gun manufactures' sales into the basement.

One of my favorite investing themes is the "exogenous event" investment theme. An "exogenous" event is an event that occurs outside an existing model that would in economic terms result in a "shift" as opposed to "movement along" a curve.

Natural gas highlights one of my favorite investment strategies, a tactic I call "exogenous event trading." I scan the markets looking for large pops in the price action that are due to sudden and unexpected events that couldn't have already been discounted into the markets, i.e. exogenous. I then determine if the event is short-term in nature, or something that fundamentally changes the future prospects for gains. Weather and other natural phenomenon are the most obvious short-term events that can drive stocks higher.

Right now the weather is being blamed for causing all sorts of problems for our economy. The weather is the cause of the slow economic recovery that has resulted in stubbornly high unemployment, and the reason interest rates have fallen since the Fed started the "Taper." The falling interest rates and continued slow growth have also resulted in expectations building that the Fed may need to slow its "Taper," that in-turn has driven gold higher.

Fed: Severe weather impact seen throughout US economy

The nice thing about the weather is that it changes, and much of the demand that wasn't met in the winter will be pushed off into the spring. When that happens, trends developed in the winter should reverse. Natural gas prices should return to normal, unemployment numbers should improve, economic growth should strengthen, 10 year interest rates should re-test 3% and gold should resume its decline. What goes up must come back down when the trend is based upon short-term/temporary events.

On Wednesday another stock is hitting the headlines that has been greatly impacted by an "exogenous" event. Fear of greater gun control legislation has driven Smith & Wesson (SWHC) up nearly 20% on very strong earnings.

Smith & Wesson Holding Co. SWHC +17.88% was the stock to own Wednesday, up 18% after the gun maker posted a 42% jump in its fiscal third-quarter profit. It was way better than investors expected.

I've personally witnessed this investment theme in action. Fear of greater gun control legislation has a Pavlovian affect upon many in America, stimulating them to run out and buy guns and ammo. This effect crosses political boundaries, and Republicans as well as Democrats respond to the silent whistle to go buy guns. This phenomenon however is completely confusing to the political far left pushing the gun control legislation. This is one of those issues where both sides will never see eye-to-eye.

Talk to someone on the far left, someone that hypnotically trusts the government, someone that embraces big government and the nanny state, and they can't for the life of themselves understand why people need to own those awful guns that do so much harm. Talk to someone on the right and they will simply point to history, Syria and the Ukraine today and point out that armed governments and unarmed citizens has historically been the recipe for disaster. Mentally ill lone gunmen don't even get a footnote mention in the history of world atrocities. The political left would prefer to trust the government and hope nothing goes wrong, the political right would prefer simply not to trust the government. If the left gets its way, and they are wrong, everyone, left and right is in big trouble, if the right gets its way and is wrong, no big deal, a bunch of people spent money on guns and ammo that they didn't need. Given the 2 outcomes, I side with the right, as do most Americans including many voting Democrats and Independents.

With the political dynamics being understood, SWHC may be in trouble going forward. As this article highlights in its headline, "Smith & Wesson's future depends on continued paranoia." The upcoming election will likely have a significant material impact on the future earnings of SWHC and other gun manufactures. A landslide victory for the Republicans this fall will almost certainly send the earnings of SWHC and other gun makers into the basement for at least the next two years. If one wants to know the direction of SWHC going forward, all one needs to do is watch the political polls going into the election. Right now it is looking like SWHC is almost a certain short. The Republicans look to be headed towards holding the House and an outside chance of taking the Senate. If the Republicans take the Senate I would bet that gun manufactures are going to have a very very very difficult day following the release of the election results and for at least 2 years following.

Midterm elections generally favor the party that does not hold the White House, which gives the GOP a head start this year. Political handicappers rate Republicans as favorites to maintain their House majority and say the GOP has a legitimate opportunity to gain the six seats it needs to take control of the Senate.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.