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Election leads to run on gun stocks

November 7, 2012: 12:12 PM ET

Investors appear to be betting that a second Obama term could mean stricter gun control laws ... and a rush to buy weapons before that happens. But are the fears rational?

The election is finally over. It's not a huge surprise that so-called Obama stocks in health care (particularly hospitals) are rallying, while stocks that might have fared better under Mitt Romney, such as coal companies and banks, are tanking.

But there is a rally in one small sector Wednesday that may seem counterintuitive at first: guns and ammo. Firearms manufacturers Smith & Wesson (SWHC) and Sturm, Ruger (RGR) both popped Wednesday. Shares of hunting goods retailers Cabela's (CAB) and Big 5 Sporting Goods (BGFV) were also higher.

The reasoning? Traders on StockTwits are citing continued fears that President Obama may eventually want to push for stronger laws on gun control. And that apparently has investors thinking that nervous fans of the 2nd Amendment will rush out to buy guns before it gets tougher to do so.

miningalmanac: Gun stocks $RGR $SWHC up big in pre-open. $GOLD & $SILVER too. So much for efficient markets - Obama was a lock, but this wasn't priced in.

Well, I'm not sure Obama was necessarily a lock. But it is interesting that Smith & Wesson, Ruger, Cabela's and Big 5 all rallied Tuesday as well and kept climbing Wednesday even as the broader market was in free fall mode.

WALJR: $RGR just like when people think they cant buy something they stock up on it like never before!

PAAResearch: It's amazing that $SWHC might be the biggest gainer today from the Obama victory. The "Obama fear" trade in this name continues $RGR

It is a bit curious that these stocks have rallied so hard for such a long time on this premise. Just look at how well SWHC and RGR have done since Election Day 2008.

Correct me if I'm wrong. But it's not as if the alarmist concerns about how an Obama victory four years ago would lead to tough gun control have come to fruition.

I'm not sure that there will be stricter federal gun regulations given that Obama did not win a clear mandate and Congress is still split. Let's be honest. If the tragedies in Aurora, Colorado and Oak Creek, Wisconsin earlier this year -- not to mention the shooting of former Congresswoman Gabrielle Giffords in 2011 -- haven't brought the issue of gun control to the forefront, it's not really clear what will.

With that in mind, some traders were also skeptical about how long the gun rally could last.

RaveD: $CABwon't hold these Obama gains for long

RobertWeinstein: shorting $SWHC love the company, just overbought from panic buying

datagoodies: $SWHC Don't waste your money on election day paranoia.

Yes, the fundamentals for gun companies look strong. Analysts are predicting healthy increases in sales and earnings. Valuations are reasonable too, with SWHC trading at less than 11 times earnings estimates for next year and RGR at a forward P/E of about 15.

But anytime emotions get in the way of logic, a long-term investor should take notice. The gun stocks may be getting ahead of themselves based on fears of a scenario that may never unfold.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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