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Pistols, Profits, And Politics

|Includes: American Outdoor Brands Corporation (AOBC), RGR, WMT

One of the sectors currently experiencing some of the most growth is the firearms industry. In January, background checks for gun permits rose 17.3% YOY. States that regularly report concealed carry permit numbers have seen increases in active permit holders ranging from 46% to 161%. This growth has not sudden or abrupt: January's numbers marked the 20th consecutive month of increases in gun permit checks and record gun sales numbers were evident in 2011's huge shopping occasions such as Black Friday, which experienced a 32% increase in background checks YOY. Although multiple firearms may be bought after a single background check and a person may require multiple background checks for a single purchase, background checks provide a reliable rough estimate of the growth of gun sales. Moreover, other indicators of strong firearm sales also point to strong consumer demand. Federal excise taxes collected on the sale of new firearms and ammunition have risen 48.3%. Firearms company Sturm, Ruger & Company, Inc. (RGR) received bookings for over 1 million firearms in Q1, which has led the company to suspend acceptance of new orders, expecting to "resume the normal acceptance of orders by the end of May."

The strong demand for firearms can be attributed to a variety of factors. The major factor is the presidential election, as many prospective gun owners and existing gun owners are afraid of increased restrictions on gun ownership if Obama is reelected. In fact, National Rifle Association President Wayne LaPierre recently stated that the Obama administration's policies were "part of a massive Obama conspiracy to deceive voters and hide his true intentions to destroy the Second Amendment during his second term." This fearmongering and potrayal of Obama as an adamant opponent of gun ownership has spooked people into buying firearms, especially as the Republican primary draws on and Republican opponents continue to tear each other apart. There were similar increases in firearms demand after Obama was elected for his first-term. Gun sales have been buoyed by the pervasive sentiment that Obama, if elected as a second-term president, will clamp down on firearms and apply stringent restrictions to owning firearms without having to worry about voter demographics and re-election prospects.

Other major factors driving guns sales are judicial and state legislative action. Many states have recently enacted laws that permit the concealed carrying of firearms, which has increased firearm appetite among consumers. Conceal-carry permits are now available in 49 states. Moreover, the Supreme Court has stated in several decisions that the Second Amendment's guarantee of an individual right to bear arms applies to state and local gun control laws, decisions which are viewed as moderate successes for gun rights advocates and which have also impacted firearms sales.

The state of the economy has also heavily factored into the growth of firearm sales. In fact, economic uncertainty and instability have fueled the firearms industry as fears about crime and safety have trumped considerations of cost. Believing there is a correlation between economic instability and increased violence and crimes, people who would have otherwise never considered buying firearms are now stocking up to protect their families and homes. As a result, gun sales have grown almost constantly.

The market for firearms and munitions is prospering as a combination of a variety of government and economic factors have led to strong consumer appetite for firearms and huge profits for firearms companies. As a result, these companies, such as Sturm, Ruger & Company Inc. and Smith & Wesson Inc. (SWHC), have seen their stock prices soar. Sturm, Ruger & Comapany Inc. is up 46.7% YTD while Smitth & Wesson Inc. is up 77.8% YTD. Other companies have taken note of the strength of the gun-market. Recently, Wal-Mart (WMT) decided to go back on its 2006 decision to pull firearm products out of a majority of its stores and firearms products are reappearing in a large amount of Wal-Mart stores. With no signs of customer demand slowing, the growth of the firearms market presents a tantalizing opportunity for investors.