The gruesomeness of the Sandy Hook tragedy reignited the topic of gun control with a fervor and emotion not seen in a long while (if ever). While the proliferation of gun ownership and sales throughout America has always been a revolving topic, mainly centered around other tragedies (Columbine, Virginia Tech, Aurora) or the election of a Democratic president, the involvement of children in this tragedy has seemed to spotlight the issue and bring attention to the issue of American weaponry to a much larger base of citizens.
Immediately following the events, the stock prices of the two direct gun plays - Sturm, Ruger & Co. (RGR) and Smith & Wesson Holding Co. (SWHC) - were absolutely hammered.
RGR went from a Friday, December 14th open of 47.50 to a Tuesday, December 18th low of 40.00 (-16%). SWHC went from a Friday, December 14th open of 9.75 to a Tuesday, December 18th low of 7.67 (-21%).
Initial public market reaction to the gun stocks was clear. US Congressmen and Congresswomen clamored for the media spotlight to voice their anti-gun opinions, the media reported that "this time it's different", Obama announced his intention to make executive changes to the gun laws, and the National Rifle Association sat quietly.
Cerberus Capital, a private equity shop and owner of Freedom Group (which owns certain gun/gun accessory manufacturing companies, including Bushmaster - the maker of the Sandy Hook rifle), announced on December 18th that the school shooting was a "watershed moment" and that they would be "immediately engaging in a formal process to sell our investment in Freedom Group. On top, multiple pension funds began announcing their intention to divest of their gun manufacturing holdings, including the $154-billion California State Teachers' Retirement System, all resulting the in the above drop.
Leaving out personal feelings towards guns and morality of gun ownership (note: I might have, or might not have, taken Emily Anne on a first date to a gun range in Texas), the brash sell-off did strike me as somewhat counter intuitive from a valuation standpoint.
From a theoretical valuation standpoint, the main driver of the dip is two fold:
1. Social impact on value via selling from those individuals and funds that no longer want an ownership interest in those equities.
2. Fear impact on value via the overestimation of the extent that gun control laws will impact these companies (and how fast this will be built into law).
While at the same time the equity prices of these two stocks were plummeting, their products were undergoing a buying frenzy. Having personally visited many local gun stores around Texas throughout December (and even calling a few non-Texas based gun stores), it was incredibly evident that their stock and supply was gone.
Prices on guns, accessories, and magazines increased to upwards of 3x their selling price from before December 14th. One gun store told me that he had 108 AR15 rifles in the morning of December 14th, and by Sunday had none left. The store owner went on to say that even with a 100% increase in the sale price on 30-round magazines (which are under regulatory scrutiny), he was selling out a few minutes after his shipments arrived, and desperate buyers were then turning to the pistol showcases and snatching up what they could.
One 30-round magazine manufacturer, Magpul, announced that they sold 3 1/2 years worth of supply within 72-hours. In addition, there are multiple retailers, including big box stores, which are not only selling out their supply of guns and accessories, but their ammunition, too.
Everything but shot gun shells and some small caliber bullets are completely sold out.
**Note: If you're looking for a non-direct gun play, you can take a look at ATK and OLN, as they are a major supplier of military, police, and civilian ammunition.
Couple the above buying frenzy with news that the FBI had performed 2.78 million firearm background checks in December 2012 (nearly 2x the amount performed the December before - 1.4 million), and it's evident that RGR and SWHC are going to continue building on their record setting sales records of 2012.
While RGR and SWHC have bounced back from their mid-December lows, they seem to still be in murky waters based on the worries that a federal crackdown on weapon purchases and gun ownership in America is going to cause long term sales contractions. President Obama assigned VP Biden to head an executive task force with the goal of supplying concrete recommendations on how to address the gun issue.
Leading into VP Biden's announcement and list of recommendations, and subsequently President Obama's Executive Order actions (of which he previously stated he would be doing, thus bypassing Congress' input), RGR and SWHC retracted again. However, of the list of 23 Executive Orders that were signed on January 14th, none had much of a direct impact on the future sales that RGR and SWHC would continue to see.
Here's a quick summary of the orders passed:
So while a mountain of gun bills continue to pop into the media spotlight, the most worrying ones from the standpoint of RGR and SWHC (from shareholder point of view), are those that limit or outright ban specific weapon types.
As of right now, the main points that certain Congress members are trying to pass are:
1. The banning of "high capacity" magazines (which are standard magazine sizes for modern rifles).
If this were to pass legislation, wouldn't millions of American's need to then go and repurchase their magazines to allow their weapons to legally operate? Assuming the magazine size is limited to 10 bullet rounds, one potential outcome would be that weapon owners go and purchase 3 new magazines to make up for their now illegal 30-round magazine.
Note: Much of the argument from pro-gun sides are that the limit on magazine size doesn't impact how deadly the weapon is. Changing of magazines takes only seconds. What this does is makes target shooting by legal owners much more hassle some based on the need to constantly reload the magazines with new bullets. One way around this is to simply purchase more magazines that can be loaded at one time.
2. The banning of "military-style attachments" (which includes things like flash suppressors, bayonet mounts, etc.).
This would cause issues with the sale of attachments for modern rifle owners. Currently that makes up around 6% of sales for RGR and 5% of sales for SWHC, but not all of these parts would fall under the terms of a ban.
3. Banning of the sale of specifically mentioned weapons, including the potential to ban any semi-automatic weapon that has a detachable magazine.
This would immediately render these companies at a fraction of their current value (basically would have shotguns, revolvers, and center fire rifles that wouldn't fall under this ban). In realistic chances, this has all but 0.25% chance of passing considering the Republican held House.
Couple that with the rise in pro-gun rallies that have broken out across state capitals, the base of gun owning citizens (approximately 52 million Americans owning 260 million guns), and the powerful lobbying group at the National Rifle Association, this nearly provides a 0% discount rate that must be applied as a risk ratio.
So thus concludes my cursory "theoretical valuation" analysis of the direct gun plays. I'd be interested in anyone adding more fundamental or technical analysis in the hopes of proving / disproving an over-priced/under-priced equity.
Disclaimer: I currently own RGR, SWHC, OLN, and ATK. However, this is not a suggestion to buy, especially not if they turn out anything like my investment in FB or recent one in AAPL.
As I myself am fan of guns, I will watch this closely and consider investing at some point. 
