Obama’s Reforms Fuel Gun Stocks

On Tuesday, gun stocks rallied after President Obama announced new measures to reduce gun violence in America. The measures provide more authority to government executives to expand background checks while extending gun license laws and increasing enforcement of firearms laws. Investors believed that the new restrictions will not deter sales; they will increase them.

Share Price Impact

Shares of the largest gun manufacturer in the world – Smith & Wesson Holding Corp. (SWHC) – surged by 11.08%, while Sturm, Ruger & Co.’s (RGR) shares increased by 6.76% on Tuesday. The share prices of both companies have rocketed by 180% and 89% respectively in the last 12 months. Smith and Wesson Holding Corp. has already provided robust earnings guidance for the fiscal year 2016 that ends in April.

Smith & Wesson said in a statement, “The Company indicated that the sell-through rate of its products at distribution has been stronger than originally anticipated, resulting in reduced distributor inventories of its firearms.” It added, “We experienced strong consumer demand for our firearm products following a new administration taking office in Washington, D.C., in 2009.”

Accelerating Sales Trends

Background checks are the best indicator for sales trends in the U.S. According to the FBI, background checks have increased by whopping 38% in the last 12 months ending in December. Many analysts believe that the presidential election and end-of term potential for further restrictions on gun sales will stoke fears among consumers.

Rommel Dionisio, an analyst at Wunderlich Securities, said, “As the firearms industry has seen numerous times before, the threat of gun control legislation again appears to be driving near-term retail sales acceleration, as consumers rush to dealers to purchase firearms they believe may one day become unavailable.” Rommel added, “We believe such accelerated sales trends are indicative of consumer fears stoked by recent geopolitical events such as the San Bernardino and Paris shootings, and President Obama subsequently calling for tightened gun control in response.”

New Measures for Controlling Gun Violence

President Obama’s gun plan is aimed to increase the number of background checks online and in gun shows by directing the Bureau of Alcohol, Tobacco, Firearms to monitor the quantity and frequency of sales, instead of focusing on the location of sales. Consumers who buy guns from trusts or corporations also will not be exempted from background checks.

The Bottom Line

Obama’s new gun plan expectedly provided fuel to the stock prices of gun manufacturers on Tuesday. Analysts believe that the new gun plan, aimed to control gun violence in the U.S., will propel sales for gun manufacturers in the near-term. Many analysts believe that gun stocks will continue to rally this week as President Obama will interact with American citizens directly in a town hall meeting to discuss the issue.