Tags: Great | Gun | Grab | Investors

What the Great Gun Grab Means for Investors

By    |   Tuesday, 17 January 2012 08:09 AM

Santa packed a lot of heat over the holiday season.

You see, the two days of the largest gun sales ever occurred in 2011. The first was Black Friday, the second was Dec. 23.

More than half a million names were sent in for background checks.

Indeed, the past few years have seen a surge of gun sales. Why? Depends on who you ask. The NRA suggests that sport shooting is becoming more popular.

According to the U.S. Fish and Wildlife service, over 15 million Americans pay for a hunting license each year. That makes American hunters the largest standing army on earth. But, the total number of hunting license issuances is on the decline, having peaked at 19.1 million in 1975.

The NRA also suggests Americans are more concerned with self-defense.

Gun dealers likewise indicate the importance of self-defense, but add that fear of future gun legislation may also play a role.

As government services become subject to tightening local budgets, it’s clear why self-defense remains a top concern for both dealers and the NRA. As the saying goes, if you’re not strong enough to carry a cop around, carry a gun. It stands to reason that, if the economy continues to remain weak, more may turn to a life of crime.

FBI crime statistics disagree, showing a falling trend in violent crimes.

But fear is often a better salesman than facts.

That’s why, as investors, we should take a look at what opportunities are available in firearms companies. Although the lion’s share of these companies is privately-held concerns, a few trade publicly.

The first is Strum Ruger (RGR). There’s a lot to like about this company. Sales have been expanding. The company pays a modest 1.6 percent dividend. There’s over $4 in cash per share and there’s no debt. But the stock has had a huge run. 18 months ago, it sold for 10 times earnings, today it sells for nearly 20. Shares are too expensive today, trading at 52-week highs, even if gun sales continue to accelerate. On a selloff, however, it’s worth a closer look.

Next up is Smith & Wesson (SWHC). As a company, it’s worse off than Ruger, carrying net debt, seeing declining sales, and currently has some losses. Worse, inventory is on the rise. Typically when that happens, it becomes necessary to sell excess inventory at bottom basement prices.

Finally, there’s Olin Corp. (OLN). In addition owning the Winchester brand, it’s also a maker of alkali chemicals, giving it some diversification outside the firearms industry. With a 3.9 percent yield and trading at 8 times earnings, it’s a compelling buy for anyone looking to profit from the trend of increasing gun sales.

There are many different reasons to own a gun, but only one reason to own shares of a gun manufacturer: to make a profit.

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Tuesday, 17 January 2012 08:09 AM
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