| SAN FRANCISCO, March 16
SAN FRANCISCO, March 16 Gun owners were thrilled
with Donald Trump's election in November. So were short sellers
of gun stocks.
Trump's surprise victory on Nov. 8 turned gunmaker shares,
one of the most profitable investments under his predecessor,
Democrat Barack Obama, into a top money-maker for traders who
take a gamble on falling stock prices.
Shares of firearms makers Sturm Ruger & Company,
American Outdoor Brands Corp and Vista Outdoor Inc
are down by between 17 percent and 47 percent since
Fears of gun control following mass shootings in San
Bernardino, California, and Orlando, Florida, along with
concerns a win by Democrats in the November polls could usher in
more firearm restrictions, led to record U.S. gun sales last
year and propelled firearm stocks to all-time highs.
From Obama's inauguration in January 2009 through Trump's
election victory, Sturm Ruger shares delivered a total return,
including reinvested dividends, of 1,315 percent, while American
Outdoor Brands, formerly known as Smith & Wesson, returned
nearly 1,060 percent. Vista Outdoor had risen 14 percent since
its market debut in January 2015.
But the victory of Republican candidate Trump, who opposes
regulations on gun ownership, abruptly undercut demand as people
became less worried the government would curtail their ability
to purchase firearms.
The steep drop in guns sales threw gunmakers' shares into
free-fall, and privately held Remington, which has been making
firearms since 1816, this month laid off 122 workers from its
factory in Ilion, New York.
While bets that Trump will cut corporate taxes and slash
financial regulation have sent the S&P 500 up 11 percent since
the election to record highs, short sellers targeting gun stocks
have reaped even richer rewards.
Vista Outdoor gets about half of its revenue from selling
guns and ammunition, and a 47-percent slump in its shares since
the election puts it at the bottom of a list of more than 2,000
U.S. companies valued at $1 billion or more, according to
Thomson Reuters data.
Short sellers have counted nearly $200 million of paper
profit betting against American Outdoor Brands and Vista Outdoor
over the past four months, and some traders have recently moved
out of those stocks and into rival gunmaker Sturm Ruger,
according to S3 Partners, a financial analytics firm.
Sturm Ruger's stock has fallen less than its peers in recent
months, making it more attractive to short sellers betting the
industry downturn is far from over, said S3 Partners' head of
research, Ihor Dusaniwsky. A 9 percent recovery in Sturm Ruger
in the past week has left its stock down 17 percent since the
"Traders think American Outdoor and Vista have hit their
targets, and now they're reallocating some of their short assets
to Sturm Ruger, thinking that it will catch up to the other
two," Dusaniwsky said.
After sales "took a nosedive" around Thanksgiving, it may
take three quarters for gun owners to use up ammunition they
stockpiled before the election and return to normal buying,
Vista Outdoors Chief Financial Officer Stephen Nolan told
analysts at an event on Tuesday.
Short-sellers borrow and then sell stocks they think will
fall in value, hoping to profit by buying the stock back more
cheaply later on and then returning it to its owner.
Short interest in Sturm Ruger & Company in late March rose
to 30 percent of its outstanding shares, its highest since 2013.
But with most available shares of Sturm Ruger already shorted,
traders are paying interest rates as high as 23 percent to
borrow new shares, according to Astec Analytics.
In a sign that gun stocks - if not gun sales - may be set to
recover, Vista Outdoor, American Outdoor Brands and Sturm Ruger
all rank above the 70th percentile in a Thomson Reuters Starmine
model that uses volatility and liquidity to predict what stocks
are most likely to outperform over the next month.
Federal Bureau of Investigation background checks in
February fell 13 percent, the third month in a row of
year-over-year declines, according to the National Shooting
Sports Foundation. But that drop was less severe than January's
24 percent year-over-year decline. As well, checks from January
to February increased 25 percent, a bigger increase than normal
between those two months.
"It's safe to say that things are going to be, at least for
a period of time, less robust now that Donald Trump is
president," said Wedbush analyst James Hardiman. But he said the
deep drop in demand in the three months following the election
is unlikely to become the norm.
Background checks are the best proxy for data on monthly gun
sales, which manufacturers do not publicly release. The
foundation strips the data of applications for conceal-carry
permits -- typically made by people who already own guns -- to
give a better reflection of actual purchases.
(Reporting by Noel Randewich; Editing by Dan Burns, Megan
Davies and Andrea Ricci)