A leading equity analyst told Human Events that Cerberus Capital’s decision to sell The Freedom Group, its collection of gun makers that includes Bushmaster, Remington and Marlin, was business, not politics.
“I would say it is a reactive move, based as to whether there will be incremental legislation to pass that would ban the commercial sale of these products—and that’s an unknown,” said Chris Versace, a professional equity analyst and the author of the “PowerTrend Profits” financial newsletter, which is offered by Eagle Publishing, the parent company of Human Events.
“You have to remember private equity guys, venture capital guys, even hedge fund guys and mutual fund managers, their jobs is to generate positive returns no matter what the market is doing,” said the regular contributor to Fox Business and The Washington Times.
“They will look for growth businesses,” said the Virginia-based analyst, who was named an “All Star Analyst” by Zacks Investment Research. “In this case there is a question, or not, if this asset will be growing.”
Versace said the key for Cerberus was the market uncertainty, which meant they have to go to the sidelines.
Wall Street-based Cerberus Capital said in their Dec. 18 statement that their 2006 investment in Madison, N.C.-based collection of gun and accessories companies that it called The Freedom Group was specifically structured to avoid firearms sales to anyone but federally licensed retailers or government agencies.
One of the weapons used in the Dec. 13 Sandy Hook School spree shooting as a Bushmaster AR-15, a long gun designed with the look and feel of the M-16s used by the American military. Bushmaster was the first brand purchased by Cerberus in the creation of The Freedom Group.
“We do not believe that Freedom Group or any single company or individual can prevent senseless violence or the illegal use or procurement of firearms and ammunition,” the company said.
The private equity firm has been involved in a wide-range of investments since its 1992 founding, including real estate, the purchase the Caritas Christi Health Care group of hospitals and facilities from the Roman Catholic Archdiocese of Boston and its one-time ownership of Chrysler. The company gave up its stake in the automaker in exchange for a federal bailout of Chrysler’s financial services business.
Cerberus said it will hire an adviser to explore how it will unwind The Freedom Group, which generates $900 million in annual sales from its 11 major brands.
“It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level,” the company said.
“The debate essentially focuses on the balance between public safety and the scope of the Constitutional rights under the Second Amendment. As a Firm, we are investors, not statesmen or policy makers. Our role is to make investments on behalf of our clients,” it said.
Versace said, “When there is any type of uncertainty, whether it’s the presidential election or the fiscal cliff, the stock market does not like uncertainty. When faced with it, the market goes the other way, and by that I mean: not higher.”
Cerberus needs to get out of the firearms business and get whatever they can for it, he said.
Tragic events such as the Dec. 13 spree shooting in Newtown, Conn., often lead to snap judgments that lead to opportunities for investors that can see the long term he said. “All you have to do is look at the number of background checks conducted by the FBI this year.” Background checks through a national database run by the FBI are required for gun purchases.
“It is my understanding that background checks on Black Friday were up 20 percent alone, year-over-year,” he said. Black Friday is the day after Thanksgiving that marks the beginning of the Christmas shopping season, the time when most retailers generate the sales that put them “in the black” or profitable.
Buyers, who plan to purchase firearms in the future, will make those purchases in the present to avoid future restrictions on gun rights or the firearms that are legally available, he said.
Investors, he said, who look past the tragedy in Newtown, might want to look at a stock such as Smith & Wesson (NASDAQ-SWHC), because a significant percentage of its revenues come from handgun sales, not long guns, and from military and law enforcement agencies, and it does not have the exposure to consumer sales of long guns that will most likely be part of any new gun control regime.
Smith & Wesson closed Jan. 3 at $4.49 per share and reached a 52-week high intra-day Sept. 20 at $11.25. The stock closed Dec. 12, the day before the shooting at $9.76 and fell to $8.43 Dec. 18 on 22 million shares traded—more than seven times its average daily volume.