Should You Buy Stock In Gun Companies?

In the last downturn, many sectors of the market seemed to make perfect investment sense in the financial atmosphere of the time. It turned out that the only investments that did not lose money were U.S. Treasuries and gold. As an investor, and as an advisor, I want a more diversified portfolio, and more of a return than these two investments would provide. Where else to look in the ever changing, in fact potentially radically changing, American financial landscape?  It might also behoove an investor to take a real look at the political landscape, as well, as so many changes, and huge changes they would be, are out there. I mean, you have to have a good look, and think, let’s see, how are my investments in the short term and long term likely to be impacted from the next round of increasing taxation that will surely reach even deeper into my pocket?  

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And then I thought, maybe — stock in gun & ammunition companies!

In contemplating an investment in the stock of gun and ammunition companies, one needs to understand that this particular part of the business landscape differs from just about any other business sector. There are several reasons for this; the first and most significant is the ever-present elephant in the room regarding this sector. On the surface, the products of gun and ammunition companies, in terms of putting one’s money into a product attractive to the investing public, would seem to be the same as any other being produced, marketed and competing in the American and international markets. Unlike most of the other products in these markets, however, gun and ammunition company stock will never escape from the political and/or legislative agenda that those committed to either the support of or the opposition to the Second Amendment to the Constitution espouses. Both sides of this issue are equally passionate: to some Americans, being able to exercise their 2nd Amendment rights is akin to a guarantee of their liberty; to those on the other side of the issue, gun ownership is tantamount to a license to kill.  Both sides of this issue engender vociferous, active and well-funded voices, and, as a result, the very fact of gun ownership has become and probably always will be, controversial, and certain to create significant movement on either or both sides of the issue.  

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Clearly, the value of the stocks of the companies manufacturing these products, whether you think it is a symbol of liberty, or the object of the devil, is subject to the always vocal activities of these partisan advocates. There is, for example, an organization called SocialFunds.com which exists to identify any guns or ammunition company stock in a given mutual fund. This is so that any member of the unsuspecting public may jettison this stock and thus be protected from being duped into owning such evil in their portfolios. There are also numerous other so-called ‘socially responsible’ funds that will not buy stock in any gun or ammunition companies, nor in any that produce or distribute such equally evil products such as tobacco or alcohol.  Some will not even own stock in any company that has any weapons related business in any way.

That said, when considering whether or not to buy the stocks of these companies, it is a fact that the military and law enforcement, both nationally and internationally, will always have a need for the products of gun and ammunition companies, whether they are politically popular or not.  This thus creates a permanent constituency for the products of these companies and this need would seem to establish a base of stability in the sector.  Then again, there is the very real possibility that budget cuts at all levels of government may reduce the size not only of the Department of Defense, but also law enforcement at every level.  This is also true with regard to foreign governments who purchase American gun and ammunition company stock.  Even so, purchases of firearms would still have to be made, but at lower amounts, thus negatively affecting the stockholder.  

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Upon an initial examination of the sector, one finds that some of the best-known gun companies are privately owned (i.e., not a company whose stocks are traded on national exchanges). For example, Colt, the best known and most well-regarded pistol company in the United States, is 83% owned by Zilkha & Co., which is a New York based banking firm, and is not publically traded. The equally well-known international gun brand of Beretta, is actually Fabbrica d’Armi Pietro Beretta, S.p.A., which is run privately by the Beretta family in Italy, as it has been since 1526. There is a lot of stability; but clearly but no chance to buy stock in the family-owned firm. The private ownership of gun and ammunition companies is, we observe, the pattern in this sector.

Cerberus Capital Management, L.P., the large diversified private equity partnership, has made a substantial investment in this sector.  Good news for this sector could be seen in October of last year, when Cerebus was planning for the IPO (an initial public offering of stock) of a company under the name of ‘The Freedom Group.’ ‘The Freedom Group’ is a company comprised of the following: Advanced Armament Corp., Bushmaster, Dakota Arms, DPMS, Eotac, H & R, L.C. Smith, NEF, Parker Gun and the Remington Arms Company. This group would seem to dwarf the ‘public’ competition, who are respected gun makers but who are smaller companies by comparison. While greatly anticipating this IPO opportunity, gun and ammunition company enthusiasts should perhaps remember that the Cerebus Capital’s most recent venture was to buy Chrysler from Mercedes Benz, then to give it to Fiat in bankruptcy. That it did not work out as well as investors might have planned but, hopefully “The Freedom Group” will do better..

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The international firm, Sturm, Ruger & Co., however, is publically owned (i.e., traded on a stock exchange, in this case the New York Stock Exchange with the ticker: RGR). The only gun company in the world that manufactures products in all four gun categories; i.e., revolvers, pistols, rifles and shotguns, Sturm, Ruger & Co. currently has more than 20 million shares outstanding. The value of the stock of this company, perhaps reflecting on the recent volatility of the market rather than that of the sector, has gone from a low in December of 2008, of $5.88, to a high in July of 2009 of $15.20. Ruger began the year with a price of $10.00 per share. As of the beginning of this year, analyst expectations for Ruger were quite mixed and evenly split between ‘buy’ and ‘sell’ recommendations.

Another public gun company in America is Smith & Wesson, the largest handgun manufacturer in the United States. It is also publically owned, as it had been bought by the UK based firm, Tompkins, PLC, but was later resold to Saf-J-Hammer Corporation for a fraction of the price Tompkins paid for it. It is currently known as the Smith & Wesson Holding Company, whose ticker symbol is SWHC, and is traded on the NASDAQ market. The company had a total of $295 million in revenues, as reported in 2008, and its stock is currently valued at around $4.00.  Looking at analysts’ reports, most view Smith & Wesson as neutral or hold as of the beginning of the year with very few recommending a buy.

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It should also be pointed out that penny stocks, i.e., stocks that are valued at less then $5 per share, in general, are always considered to be the riskiest of stock purchases.

In general, gun companies have been consistent and solid producers of revenue while their value as an addition to the portfolio of publically traded securities has been mixed.  The fact  that a permanent clientele in armed forces and law enforcement exists as a market for the products of these companies, both nationally and internationally, and with other potential gun owners, as well, might make this sector an investment for the long term as long as one understands the politics as well as the economics involved.  The rapid run-up in the share prices of RGR and SWHC that began right after the 2008 election seems to have passed.  RGR and SWHC appear to have fallen more into place with market participants as a whole.  While the outlook of these companies to continue to produce products and turn a profit, thus looks good, one must consider the ‘politically incorrect’ designation in deciding whether or not they are a good investment.

A well diversified portfolio that includes exposure to and allocation in numerous asset classes, to include foreign and domestic stocks and bonds, is normally preferable to a highly concentrated portfolio as a means of alleviating risk and increasing the potential for long term returns.  The allocation of your assets should match your ability to take risk – and that means your ability to withstand losses.  Any investment in any company, as well as those mentioned above, should only be undertaken if it meets the risk and return parameters that match your investment goals.

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Next, we will examine some of the other gun and ammunition companies, both national and international, and how their stocks are doing, and expected to do, in this market.  Inquiring minds want to know, my own among them: is there profit on the way with investments in those companies?

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