Gun sales are down, so why did gun stocks just go up?
Shares of firearms companies rose on Thursday morning after a gun-fueled massacre at a Florida high school left 17 dead and 14 injured.
At first, gun stocks reacted in their usual macabre fashion, climbing on expectations of a fear-driven surge in firearms purchases. But after jumping 4.3 percent in early trading, American Outdoor Brands, formerly known as Smith & Wesson, was up only 1.6 percent by the afternoon. Sturm Ruger & Co erased early gains.
Even more surprising was the rally in the debt of Remington Outdoor, the company that earlier this week said it plans to file for bankruptcy. The bonds jumped 7 cents on the dollar Wednesday, their largest-ever intraday gain, and continued to rise Thursday.
There hasn't been any significant new gun control regulation since President Barack Obama's 2016 executive order regarding background checks. Now, with Republicans in control of Congress and the White House, there's little chance of any new laws until 2021, at the earliest.
So why was Wall Street's initial reaction to buy? Muscle memory, in part.
"A knee-jerk reaction," said Kevin Cassidy, an analyst at Moody's Investors Service, who rates Remington two steps above default. "Investors are thinking this could be the turning point, but from a consumer perspective, they won't be going out and buying more guns. Once things calm down, investors will see that the threat of increased regulation is not there-then you'll see a closer correlation between fundamentals and prices."
Since the 2016 election, gun stocks have largely sold off. American Outdoor has lost 62 percent of its value, Vista Outdoor Inc. is down by half, Sturm Ruger is off 23 percent. Background check data, a barometer for gun sales, also shows a decline in purchases. Last month's background check numbers were the lowest for any January since 2012.
Retailers simply aren't ordering firearms products as they used to. In some cases, they have too many on hand.
"Everyone thought Hillary was going to win. These retailers and distributors stocked up on the product before the election. They were really expecting a dramatic surge," said Rommel Dionisio, a managing director of equity research at Aegis Capital who focuses on publicly traded firearms companies. "The scenario didn't materialize, so after the election, they're stuck with excess inventory. They've been trying to work down that inventory, bring them down to normal levels, and in the meantime not ordering from manufacturing."
Dionisio added that an additional factor may have contributed to this morning's rally: Vista Outdoor, which owns a variety of firearms manufacturers, reported earnings Feb. 8 that beat expectations, sending its shares soaring 14 percent since.