With a Democratic Party in control in Washington since 2008, the threat to cash flow in the gun industry has been real and well known for years. A reasonable guess would be that this risk has already been priced into gun stocks, especially now that an actual bill is floating around Washington. Smith and Wesson, specifically, was trading at a high of $22.80 in 2006, and Sturm, Ruger & Co. hit all-time highs in December 2012, just before efforts to ban assault weapons were announced.
Buying these stocks today, you would be betting on the removal of assault weapon-income already being priced into gun stocks by the market if you’re looking for a short-term move. Market participants are probably expecting this legislation to happen, and they’re expecting financial performance to suffer as a result. If gun manufacturers can pull through and beat new expectations (or legislation fails), these companies could certainly be worth having in your portfolio in 2013 and beyond.
Ford Motor Company (NYSE:F) is exposed to similar macroeconomic risks as Smith and Wesson and Sturm, Ruger & Co. Put simply, cars and guns both use steel and aluminum, manufactured by major producers such as United States Steel Corporation (NYSE:X), and Alcoa, Inc. (NYSE:AA). If prices of these raw materials soar, it could have an impact on profits for gun and auto manufacturers, as input costs will increase.
If you’re an investor in any gun or auto stock at the moment, and are concerned that rising materials prices might hurt your portfolio’s performance, it wouldn’t be a bad idea to hedge against this risk by owning a raw materials producer such as U.S. Steel or Alcoa. Both raw materials producers pay a dividend of 0.80% and 1.30%, respectively. For comparison, Sturm Ruger pays a 2.90% dividend and Ford a 2.80% dividend, while Smith and Wesson pays no dividend.
Both Smith and Wesson and Sturm Ruger have beat the Street’s earnings estimates in each of the past four quarters; Ford and Alcoa have beat three out of the four previous quarters, and U.S. Steel was ahead of quarterly earnings estimates two out of the prior four. All of these companies could be excellent long-term investments, with the former four just mentioned being my personal favorites. Any group of these stocks would help diversify your portfolio into some interesting sectors that offer good upside.
While the proposed gun legislation is clearly a threat to the gun industry’s financial performance, its long-term viability is still intact. Smith and Wesson and Sturm, Ruger & Co. still have the potential to wow the investment community in 2013, and any future dips could offer a good chance to start or add to a position in these companies.
This duo will always experience Mr. Market’s traditional ebbs and flows, as short-term traders place bets on the outcomes of major events, but looking at the big picture, this industry’s stability over the long, long run is one of the best reasons to pull the trigger on these stocks in 2013.
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Disclosure: I have no position in any of the stocks above, but plan to purchase Smith and Wesson Holding Corp. (NASDAQ:SWHC) and Alcoa, Inc. (NYSE:AA) within the coming weeks.
