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Oct 4, 2017

S3 Analytics: Gun & Ammo Stocks Rally, but Shorts are Lurking

Gun and ammunition manufacturers have rallied after the tragic shooting in Las Vegas, with American Outdoor Brands (AOBC), formerly Smith & Wesson, and Sturm Ruger (RGR) up 6% and 4%, respectively. Investors are assuming that the possibility of more onerous gun and ammo regulations stemming from this shooting akin to California’s Proposition 63 which mandated background checks for ammunition purchase and a ban on large capacity ammunition magazines.

The possibility of increased regulations or outright bans on the purchase of certain guns and ammunition may prompt an increase in gun sales prior to any prohibitive federal or state regulatory is implemented. Increased and concentrated sales would augment 4th quarter results, but hurt future sales as demand is pushed forward to 2017 in lieu of 2018 purchases.

The largest companies that would be affected by this regulatory ambiguity would be American Outdoor Brands (AOBC) the parent company to gun-maker Smith & Wesson; Sturm, Ruger & Co. (RGR) manufacturer of rifles, shotguns and pistols; Vista Outdoor Inc. (VSTO) ammunition manufacturer including Federal Premium Ammo; Olin Corp (OLN) ammunition manufacturer including Winchester Ammo; and Orbital ATK Inc. (OA) manufacturer of 5.56 ammo used in semi-automatic AR15’s.

Gun owners feared a push towards greater gun regulations and a concerted effort to weaken 2nd Amendment gun rights during the tail end of the Obama administration, but those fears were mollified when the pro-2nd Amendment Trump administration took office in 2017.

By the end of 2016 overall gun and ammo company short interest increased by 108% as investors feared a dramatic drop in gun and ammo sales if a democratic anti-gun president won the 2016 election. Shorts sellers covered almost a quarter of their short exposure in 2017 when President Trump and his pro-2nd Amendment administration took office in 2017. 

If history holds true, these stocks will rally in the short term as sales increase due to gun owners accelerating their purchases in anticipation of pernicious regulatory reform. Short sellers will sell into the tail end of this rally, hoping to catch the price reversal if these regulations actually materialize. Shorts are hoping this strategy works better than in 2016 and 2017 when, although short interest increased dramatically, average returns for the five gun/ammo stocks was +1.45% and +5.44%, respectively.  Shorts were down $80.4 million in mark-to-market losses in 2016 followed by $71.7 million in mark-to-market losses so far in 2017.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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