Breakout

Gun Stocks Are Money-Making Machines, Buy the Dip! Says Najarian

Jeff Macke
Breakout

After posting staggering gains over the last 12 months, shares of gun makers Sturm, Ruger & Company (RGR) and Smith & Wesson Holding Corporation (SWHC) are suddenly shooting blanks for investors.

In the last five trading days, going into Tuesday Ruger is down about 18% while Smith & Wesson has seen a greater than 10% decline despite reporting earnings growth of 48% in the second quarter. For the year, Smith & Wesson is still up a stunning 115% compared to a 45% gain for Ruger.

Leaving moral concerns and preferences aside, the question for stock market investors is whether or not to jump aboard the gun trade. Jon Najarian says yes. Referring to the double-digit gains both companies saw immediately after the presidential election, Najarian says government action may be priced in the stocks but not the growing unrest fostered by societal tensions.

Najarian points to Ruger's roughly 800% gains from 2009 to the recent highs as evidence of the sectors' staying power. From the beginning of 2009 through the end of November Ruger was up some 840%. "That absolutely blows Apple (AAPL) away, it blows Priceline (PCLN) away, the out-performance of this stock," Najarian shouts in the attached video.

The rational investor should note that there is little if any enthusiasm for increased handgun control in America, and suggesting a flood of gun buying in reaction to the re-election of the President is something short of rational. "Government action is priced in," responds Najarian, "but I don't think we can dispute or discount enough the fear factor that people have."

Fear of bank failure, social acrimony, home intrusion and just a general American desire to own and shoot a gun are creating a market for guns that's not going away. Like it or not, making and selling guns is a high-margin business.

The bottom line, as Najarian suggests, is owning the stocks and selling calls against the position. "For the people that are playing on that fear trade, I always love feasting on the fear trade."

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