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Smith & Wesson down 10%

December 18, 2012: 2:48 PM ET

As the nation reels from the latest act of gun violence, investors have the unenviable task of analyzing what last week's mass shooting means for shares of U.S. gun makers.

Shares of Smith & Wesson (SWHC)  and Sturm Ruger (RGR)  have tumbled since a gunman killed 20 children and six adults at the Sandy Hook school in Connecticut. Cabela's (CAB), a sporting goods story that specializes in hunting gear and guns, has also been punished.

On Tuesday, Smith & Wesson stock fell 10% to end the day at $7.79 a share. That's down from $9.54 a share on Thursday, the day before the massacre.

The sell-off comes as calls for stricter gun laws grow louder, with momentum building for restrictions on semiautomatic rifles and high capacity magazines.

But some fund managers say investors are overreacting and that gun sales might actually rise in the short-term as buyers anticipate more gun control laws.

"In the past, any encroachment on the Second Amendment has resulted not in a destocking, but an armaments race," said Brian Rafn, director of research at Morgan Dempsey Capital Management, a long-term shareholder in Sturm Ruger.

Beyond that, gun ownership is deeply entrenched in American culture and any attempt to regulate the market will likely face stiff resistance from gun rights activists and the politically powerful National Rifle Association.

Related: NRA is ready for a fight

The United States is by far the largest gun market in the world, according to Rafn. He estimates that overall U.S. sales are approaching 20 million firearms this year.

Conrad Mattern, who runs money manager Peccata Global in Germany, does not currently own shares of Smith & Wesson or Sturm Ruger. But he recommends both stocks as part of an investment strategy he uses based on the seven deadly sins.

Mattern said any new regulations will take time to implement, adding that "in this time, there will be massive purchases of guns."

On StockTwits, individual traders were also debating the repercussions of the Newtown tragedy on gun stocks. Several users noted that they did not expect demand to fall and that they were sticking with the companies.

Yahoo news has article saying record gun sales, main page. Most ever applications to date. Umm, $SWHC looks good to me.

$SWHC and $RGR here, oversold on moral issues, think those traders are now out, it's just a trade, i'm not judging morality

But others pointed out that there are just too many risks right now.

The gun stocks are a perfect example of the government being the wild card on any market bad accounting....just get out $RGR

Both of the publicly traded gun makers have had significant runs this year. Smith & Wesson has gained 77% and Ruger is up 20% year to date.

But the emotionally-charged debate around gun control and potential tax hikes on capital gains are likely to weigh on the shares for some time.

$SWHC, $RGR Overall sentiment of gun stocks are ruined for at least the next few weeks.. regardless of legislation.

The fallout from the Newtown shooting has caused at least one big investor to sever ties with the industry.

Private equity firm Cerberus announced Tuesday that it will sell Freedom Group, which makes the Bushmaster rifle used in the shooting, out of concern for its clients, which include a pension fund for teachers in California and other large institutional investors.

Several well-known mutual fund companies, such as Vanguard and BlackRock, own shares of Smith & Wesson and Sturm Ruger. But their investments are relatively small and mostly limited to funds tied to the Russell 2000 index of small cap stocks. Both Smith & Wesson and Sturm Ruger are part of that index.

Related: Wal-Mart pulls ad, Dick's halts assault rifle sales

But like Freedom Group, which also owns Remington and Winchester, many gun companies are privately held.

Glock Inc., which manufactures one of the handguns carried by the accused Newtown shooter, is the U.S. subsidiary of the major Austrian gun maker. Winchester and Browning, two other well-known gun brands, are subsidiaries of the Belgian company Herstal Group.

Meanwhile, shares of Dick's Sporting Goods (DKS) rose after the company suspended the sale of certain semiautomatic rifles from its 511 stores in 44 states "out of respect for the victims and their families."

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Ben Rooney
Ben Rooney
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Ben Rooney is a staff writer for CNNMoney. He covers the European debt crisis and other international finance stories, in addition to writing about stocks, bonds, investing and other Wall Street-related news. Follow Ben on Twitter: @ben_rooney

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