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'Banner Year' Expected for Gun Stocks; Sturm Ruger Leads Charge

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  • 'Banner Year' Expected for Gun Stocks; Sturm Ruger Leads Charge

    Vice Squad: 'Banner Year' Expected for Gun Stocks; Sturm Ruger Leads Charge

    This article is part of a Real Money series on a dozen companies investors should consider adding to their watch list of so-called "vice stocks."

    Shares of Sturm, Ruger (RGR) -- which are leading the firearm stocks in Real Money's "Vice Squad" watch list -- appear to be in for another strong year, some analysts say.

    Ruger shares are up about 12% year to date, and largely because the Southport, Conn.-based manufacturer has managed to carry no long-term debt obligations, while churning out income at a steady clip. (Ruger booked $62 million in net income last year, an increase of about 59% from 2014, based on its filings with the Securities and Exchange Commission.)

    "In the fourth quarter of 2015, we observed stronger demand for those firearm products that would typically be used for self-defense such as centerfire pistols," CEO Michael Fifer said on the company's February earnings call with analysts. "This increase in demand led to increased sell-through at all levels of the channel and helped reduce inventory levels of the company's products both at Ruger and at the independent wholesale distributors. Demand continues to be strong for both self-defense type firearms and for new products through the first month-and-a-half of 2016."

    And demand does look healthy so far this year, with criminal background checks up 36% so far in 2016, compared with the prior period in 2015, based on new data released this week by National Instant Criminal Background Check System, a standard metric in charting the demand for firearms.

    "The Adjusted NICS checks, published by the National Shooting Sports Foundation (NSSF) serve as a proxy to overall consumer demand in the firearms industry," BB&T Capital Markets analysts Brian Ruttenbur and Corbin Allen said in a report this week. "March marks the eleventh consecutive period of growth and points to a recovery in consumer buying demand, in our view."

    BB&T maintains a Buy rating on Ruger and "Vice Squad" member Vista Outdoors (VSTO), and a Hold position for Smith & Wesson (SWHC), whose shares are trading up 6% and 10% so far this year, respectively, with S&W most recently being tripped up by a series of three downgrades to Neutral, as Real Money reported.

    "Smith & Wesson just got ahead of itself," Longroad Asset Management founder Paul Coughlin said in a Tuesday interview with Real Money, emphasizing the gun maker's strong performance over the past 12 months, in which shares soared about 80%. "So it went from being up 26% on the year to up 7%. Americans like guns and I don't think anything is stopping that."

    Coughlin manages a fund of so-called vice stocks, which also includes tobacco and alcohol brands, which booked a roughly 25% gross return last year vs. a mild decline in the S&P 500.

    "We believe trends will remain positive through the fall election season," the BB&T analysts said. "In our view, the recent increase in firearms sales are driven by fears of politically-based restrictions on certain classifications of firearms or restricting who can own a firearm (all second amendment rights issues). As the general election draws closer, we believe fear will be maintained and we therefore believe 2016 will be a banner year for firearms sales."

    Real Money's Vice Squad Watch List


    Diageo (DEO)
    Molson Coors (TAP)
    Constellation Brands (STZ)

    Reynolds (RAI)
    Altria Group (MO)
    Philip Morris (PM)

    Vista Outdoors (VSTO)
    Smith & Wesson (SWHC)
    Sturm Ruger (RGR)

    WYNN Resorts (WYNN)
    Churchill Downs (CHDN)
    Las Vegas Sands (LVS)

    Pat ------> NRA Lifetime Endowment Member #FAAFO