Gunmakers Fall As Momentum Builds for Gun Control


Friday's tragic school shooting in Connecticut, only the latest in a string of mass shootings over the past few years, has put gun control front and center in the national dialogue. After previous attacks, shock and grief didn't really translate into political action, but now many public leaders, including President Obama, are openly questioning whether more can be done to prevent gun violence. That has led investors to leave gun stocks in droves, with Smith & Wesson falling 18% and Sturm, Ruger& Company slipping 15% since Friday.

Firearm manufacturers work in a controversial industry and have always been sensitive to political events. In 2012, gun sales surged because of firearm enthusiasts' fears that an Obama re-election could lead to tighter restrictions on gun ownership and operation.While many observers, including me, didn't believe gun control to be on a second-term agenda for the president, Friday's horrific actions seem to be changing public opinion.

Political action builds steam
A CBS News poll released Tuesday morning found that 57% of Americans favor more strict gun-control measures to only 30% believing regulations should be kept as they are, the highest public support for gun control in more than a decade. As recently as April, only 39% of Americans favored more gun control.
This confirms other recent polls showing a sharp upswing in demands for firearm legislation.

Emboldened by public support, advocates for tighter gun control have advanced proposals. Sen. Dianne Feinstein, a California Democrat who became mayor of San Francisco after the incumbent mayor was gunned down in 1978, has promised to introduce legislation to reinstate the Federal Assault Weapons Ban, which expired in 2004. Her colleague, New Jersey Democrat Frank Lautenberg, told reporters Monday that he would introduce legislation to ban the sale of high-capacity magazines.

Even some opponents of gun control have been softening their stance. Sen. Joe Manchin, a gun-toting legislator from West Virgina who sports a lifetime "A" rating from the National Rifle Association, told reporters that Friday's tragic events "changed me." He now seems open to Lautenberg's proposal to limit the ammunition capacity of weapons. In an interview, Manchin, a deer hunter, noted:

I don't know of anybody that goes hunting with an assault rifle. I don't know anybody that needs those multiple clips as far as ammunition in a gun. The most I've ever used in my rifle is three shells. Usually you get one shot, and very seldom ever two.

While Smith & Wesson and Sturm, Ruger are both primarily known for their handguns, both companies produce semiautomatic rifles, which the industry refers to as "modern sporting rifles."These weapons would certainly be targeted by the types of gun-control proposals currently being considered. In 2012, sales of modern sporting rifles accounted for around 20% of Smith & Wesson's firearm revenue, and they were by far its fastest-growing category, providing more than half of the company's sales growth. With the hunting rifle market actually shrinking, a blanket ban on modern sporting rifles would block Smith & Wesson's most important avenue for growth.

Business activism
Gunmakers are also facing pressure from investors and consumers.
Athletic and outdoor-gear retailing giant Dick's Sporting Goods pulled modern sporting rifles from its shelves in every one of the company's 511 locations, "out of respect for the victims and their families." Wal-Mart , the nation's largest firearm retailer, has so far not suspended the sale of any weapons, but it has removed online advertising for modern sporting rifles because of "sensitivity to the Newtown massacre." Neither company indicated how long these measures would remain in place, but a prolonged cold shoulder from major retailers could close off an important sales channel for gunmakers. So far, retailers have acted voluntarily, but public pressure could force even more action on retailers' part.

Privately held Freedom Group is the nation's largest manufacturer of firearms and ammunition and produced the Bushmaster rifle used in Friday's school assault. It will be put up for sale by its owner, Cerberus Capital Management, so that the investment firm can avoid "being drawn into the national debate on gun control." This move was no doubt related to a statement by California State Treasurer Bill Lockyer that he would seek to divest state funds away from gun manufacturers.

California's two massive pension funds, CalPERS for public employees and CalSTRS for teachers, are the nation's largest pension funds, with assets totaling around $400 billion, so capital managers like Cerberus pay a lot of attention to their needs. CalPERS, particularly, is often regarded as a leader in shareholder activism, and action on its part could lead many institutional investors to eschew shares of gunmakers on moral grounds, regardless of financial performance.

Uncertain outlook
Meanwhile, many gun shops are anecdotally reporting record gun sales. A trend does seem to hold that gun sales accelerate ahead of expected regulation, so perversely, increased focus on gun control could help the gunmakers, at least in the short term. While the gun industry has been able to avoid tightened regulation in the past, the Sandy Hook shooting has many people wondering if this time is different. Some investors certainly seem to expect
a shift toward non-lethal weapons: Stun-gun manufacturer TASER International is up 10% since the shooting.

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Fool contributor Daniel Ferry has no positions in the stocks mentioned above. The Motley Fool owns shares of Dick's Sporting Goods and Sturm, Ruger. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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