Why guns & ammunition are doing well on Wall St

But new data suggests that ‘paranoia-driven sales’ might have peaked in the US

FIRST POSTED OCTOBER 29, 2009

Earlier this year Texas briefly ran out of handgun ammunition. A run on existing stocks, it was reported, was due to fears that President Obama might move to restrict gun sales - so best to load up now. Apart from illustrating what historian Richard Hofstadter calls "the paranoid style in American politics", the post-election boom in gun and ammunition sales has not gone unnoticed on Wall Street.

Last week, Cerberus Capital Management, the private-equity firm founded and controlled by Stephen Feinberg, a reputed hard-core Republican, offered Freedom Group to market in a rare, successful IPO. With more than 300 million guns in circulation, one might ask if America really needs more (unless to fuel the deadly drug cartel insurgency in Mexico). The answer appears to be an emphatic 'Hell yeah'.

In good times and bad, guns and ammo are good business. But these have been especially good times. Feinberg set up Freedom Group to acquire gun and ammunition makers, and it now owns brands like Remington and Bushmaster. In the 12 months ended June 30, 2009, Freedom sold "1.1m long guns and 2bn rounds of ammunition".

The Treasury Department estimates domestic firearm sales should total $3bn this year - two to three times as much as is typically spent. Since the election, Smith & Wesson’s shares rose 114 per cent while Sturm, Ruger jumped 92 per cent.

Freedom Group's IPO prospectus leaves no doubt about the reason: "Consumers have been concerned about increased firearms and ammunition regulations as a result of the new administration in connection with the 2008 presidential election."

But consumer data suggests the gun and ammunition sales boom may not last much longer. The firearms bubble may be bursting. Background checks on new gun owners that soared last year have dropped back down, suggesting that current sales are to existing gun owners and nuts looking to beef up their arsenals. Inventories are up, sales falling. Says Newsweek's Daniel Gross: "Paranoia-driven sales may be drying up."