There’s a really weird example of how overheated imaginations, media hype and hysteria affect stocks out there right now. Share prices for some gun manufacturers are going up because of increased speculation about additional federal gun control measures.
Two gun manufacturers in particular were benefiting from increased demands for gun control after the Roseburg massacre in Oregon. Stock prices for one of America’s most historic gun manufacturers, Smith & Wesson Holding (NASDAQ: SWHC), increased by 80% over the past year, while the value of Sturm, Ruger & Co.’s (NYSE: RGR) stock increased by 60% in the same period, The Guardian reported.
The share price growth is apparently being driven by increased gun sales. The number of applications for background checks for gun buyers in September 2015 was 20% higher than in the same period in 2014, Newsweek reported. Around 1.795 million background checks for gun purchases were reported to the National Instant Criminal Background Check System in September, a record high.
Now for what’s truly bizarre: Increased gun sales were driven by fears of new gun control measures that are largely imaginary. It is true that there have been lots of calls for new gun-control measures in the wake of recent mass shootings. What’s equally true is that there has been little or no action.
Imaginary Gun Control
President Obama’s one action on gun control is to investigate the possibility of expanding the use of criminal background checks for guns, The Washington Post reported. Obama has not taken any action; his administration is simply considering the possibility of issuing an executive order that might change the definition of high-volume gun dealers in the background check requirements. The effect of this measure on potential gun buyers is questionable, and there’s no evidence Obama will take action anytime soon.
That, interestingly enough, is the extent of new gun control action in Washington, D.C. The possibility of tough gun control laws with staunchly pro-second amendment Republicans in control of Congress is nil.
Yet there is a widespread fear of new gun control measures out there. Some of this fear is stoked by the media, especially right wing news outlets, and some of it is fueled by politicians seeking votes through hysteria. The liberal media does not help much by discussing an Australian-style gun ban, something that would be impossible in the United States unless the second amendment was repealed.
The News and Behavioral Investing
What’s truly interesting from a behavioral investing standpoint is the effect that such inaccurate media coverage is having on the gun stocks. These companies’ values seem to be increasing for no reason beyond media hype.
Take Ruger. Its share price went from $45.92 on October 13, 2014, to $58.30 on October 13, 2015, even though its revenue fell by 8.32% in the same period. Smith & Wesson’s shares, meanwhile, went from $9.18 on October 13, 2014, to $18.59 on October 13, 2015. Gun control, it seems, is good for gun stocks, or is it?
Naturally, value investors will wonder if the gun stocks make money and if they are good investments. The answer to that question is sort of.
Smith & Wesson reported some respectable financials on July 31, 2015:
- A TTM revenue of $567.76 million
- A revenue growth rate of 12.05%
- A net income of $49.47 million
- A profit margin of 9.75%
- A free cash flow of $8.619 million
- A return on equity of 27.9%
- A market cap of $1.0111 billion
- An enterprise value of $1.124 billion
- A diluted earnings per share ratio of .897
- Cash from operations of $120.65 million
- Cash and short-term investments of $55.42 million
Sturm, Ruger and Company was a little healthier; it reported the following financials on June 30, 2015:
- A TTM revenue of $498.76 million
- A net income of $25.08 million
- A profit margin of 12.47%
- A dividend yield of 1.7%
- A payout ratio of 82.19%
- A diluted EPS of 1.294
- A free cash flow of $36.124 million
- A return on equity of 12.52%
- Cash from operations of $100.84 million
- Cash and short-term investments of $61.12 million
- A market capitalization of $1.08 billion
- An enterprise value of $1.072 billion
It looks as if Smith & Wesson might be a good investment because of its low share price, but Sturm Ruger seems overvalued. These companies look like good mid-range industrial companies that are being boosted by outside events.
Once again it pays to read the financial reports because the actual numbers for either company do not justify its share price. It looks as if gun investing has become as overheated and irrational as the ridiculous debate over gun control in America.
There’s an important lesson for investors here: Never let the news media dictate or influence your investments. It is wrong and often exaggerated.
A Less Lethal Alternative
For those uncomfortable with investing in firearms makers, there’s a less lethal alternative: the stun gun manufacturer Taser International (NASDAQ: TASR). Taser saw its share price rise from $13.61 on October 13, 2014, to $23.73 on October 13, 2015.
Demand for Taser’s products, electric stun guns, might be driven by some of the same factors driving gun sales: fear of mass shootings and gun control. Like Smith & Wesson and Sturm Ruger, Taser posted some numbers that were a mixed bag on June 30, 2015.
Highlights from Taser’s financial numbers included:
- A TTM revenue of $182.65 million.
- A year to year revenue growth rate of 25.66%, which indicates that Taser’s sales are booming.
- A diluted EPS of .4736.
- A net income of $25.95 million.
- A profit margin of 13.06%.
- A free cash flow of -$3.536 million.
- A return on equity of 19.92%.
- A market capitalization of $1.279 billion.
- An enterprise value of $1.218 billion.
- Cash and short-term investments of $86.61 million.
- Cash from operations of $40.44 million.
Taser looks like a nice little tech company that might have a bright future. It looks like gun control and gun hysteria are good for business at some companies. Fear, it seems, can drive profits and in some cases pay off for investors.