The firearms industry has some interesting investing dynamics you don’t find anywhere else:
Many so-called socially responsible investors outright avoid owning gun stocks and sin stocks, which can make these stocks persistently undervalued.
The firearms industry faces a perennial threat from gun control legislation, but this just leads to spikes in gun and ammo sales whenever there are talks or fear of gun control. The most recent talks have set off a surge of interest in buying guns. During the first quarter of this year, the FBI’s National Instant Criminal Background Check System (NICS) saw a 46% increase in background checks for firearms purchases.
Gun manufacturers face an existential threat in the future if 3-D printing of guns ever takes off.
Let’s take a look at some publicly traded stocks involved in firearms, one of which could be your ace stock.
Olin Corporation (NYSE:OLN) is a chemical company that also owns Winchester Ammunition. The company distributes its ammunition under the Super X, Supreme, Supreme Elite, AA, and Winlite brand names, among others. While the company trades at a P/E ratio of 13, Winchester only makes up 20% to 25% of the business, so you are mainly investing in a chemical company. If you are looking for a pure play on firearms, you are better off looking elsewhere.
Smith & Wesson Holding Corporation (NASDAQ:SWHC) has been making firearms in Springfield, Mass., since 1856. After getting exclusive rights to the patent for bored-through revolver cylinders from Rollin White, an ex-employee of Colt firearms, for 10 years Smith & Wesson Holding Corporation (NASDAQ:SWHC) was the only legal manufacturer of revolvers with the new technology, which allows for rear-loading revolvers. Smith & Wesson Holding Corporation (NASDAQ:SWHC) now enjoys one of the strongest brand names in the business, its name is nearly synonymous with revolvers, and the company boasts a 92% brand awareness according to a recent survey. The company is the maker of firearms under its own name as well as the M&P, Thompson/Center, and Walther brands. It also manufactures black powder weapons and handcuffs, and operates an academy for law enforcement and other security professionals.
Currently, Smith & Wesson Holding Corporation (NASDAQ:SWHC) trades at a P/E ratio of 9.4; however, investors should note that this measure is backward-looking as opposed to forward-looking. With fear of gun control very high in the past year, earnings are likely closer to a cyclical high than anything close to normal. If you disagree, though, and believe demand for guns will continue to rise, Smith & Wesson Holding Corporation (NASDAQ:SWHC) looks cheap.
Sturm, Ruger & Company (NYSE:RGR) manufacturers firearms under the Ruger name from its facilities in Prescott, Ariz., and Newport, N.H. The company is hitting record sales as demand for guns surges over fear of gun control legislation. Shareholders benefit from a variable dividend that fluctuates based on a percentage of the company’s earnings. For the first quarter, the company paid out $0.49 per share, or roughly 40% of net income. This dividend policy is commendable for both being smart and shareholder-friendly. When the company is doing well, shareholders are rewarded, and when times are tough, the company does not shoot itself in the foot by paying out more than it should.
