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Why gun stocks surge after mass shootings

Nicole Sinclair
·Markets Correspondent
Why gun stocks surge after mass shootings

Early on Sunday morning, a shooting spree at a nightclub in Orlando, Florida left 50 people dead and 53 wounded, marking the worst act of terrorism on American soil since September 11, 2001.

Meanwhile, gun makers are soaring in early trading on Monday. Smith & Wesson (SWHC) jumped 7% and Sturm, Ruger & Co (RGR) rose 4% in a move sadly predictable after mass shootings like this.

The Orlando shooting adds to an already tragic list of gun violence over the past year that includes the Inland Regional Center for developmental disabilities in San Bernadino, California in December; a Planned Parenthood clinic in Colorado Springs, Colorado in November; the Emanuel African Methodist Episcopal Church  in Charleston, South Carolina in June of last year.

Smith & Wesson shares are up over 40% over the past year.

Event-driven sales

Monday’s rise in shares of Smith & Wesson amidst unfolding news of the Orlando shooting reflects data showing strong gun demand after tragic events.

The chart below highlights some of the most widely reported tragic events and the spike in gun background checks, which is a proxy for demand, following the violence.

The largest month of growth for firearm background checks was January 2013, which saw an increase of more than 90%, according to Wedbush. This demand surge was prompted initially by the re-election of President Barack Obama, who had made tighter gun control legislation a part of his platform during the 2012 campaign and in the aftermath of the July 2012 shooting in Aurora, CO. The Newtown, CT tragedy a month after the November 2012 election further prompted an effort to ban assault rifles and high-capacity magazine pistols. These events caused a flood into stores, but no ban materialized given lack of support in  Congress.

And when it seemed demand trickled off a bit, a handful of high-profile tragedies (beginning with the tragedy in Charleston, SC) hit the news in fairly quick succession, sparking a renewed interest by many to enact new gun regulations. The industry saw double-digit growth last summer.

Data suggests, contrary to common sense, that Democratic presidents have been very good to the gun industry, at least in the short run, according to Wedbush securities. The drive? The National Rifle Association (NRA) has seized on regulatory comments that prey on gun advocates’ fear of governmental confiscation of guns. Yet, still, the likelihood of any actual gun legislation is exceedingly low, according to Wedbush.

It’s important to note that firearms used in this weekend's massacre were not obtained illegally. According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), Omar Mateen legally purchased the guns he used—a .223 caliber semi-automatic AR-type rifle and a Glock handgun—within the past week, even though he had been investigated by the Federal Bureau of Investigation (FBI) numerous times.

The Federal Assault Weapons Ban, written by then-Senator Joe Biden, was signed into law in 1994 in the early days of Bill Clinton’s Administration.The law barred the manufacture of 19 specific semi-automatic guns classified as assault weapons as well as any semi-automatic gun that accepts a detachable magazine and also possesses two or more features consistent with such weapons. Congress let the law expire in 2004 under President George W. Bush’s administration, which is why Americans are able to purchase rifles like the AR-type rifle used by the shooter.

Smith & Wesson reports earnings on Thursday.