The gun industry is pointedly affected by national news and political debates. Laws and regulations can change perceptions of supply, creating buying frenzies in the market that drive gun stocks to incredible heights, only to see them come crashing down when Washington D.C. has moved onto other issues.

In this clip, Sean O'Reilly and Vincent Shen discuss the rising rate of firearm sales based on FBI NICS background check data, the ups and downs of gun stocks, and how much politics can affect companies like Sturm, Ruger & Co. (NYSE:RGR) or Smith & Wesson (NASDAQ:AOBC).

Listen to the full podcast by clicking here. A full transcript follows the video.

 

This podcast was recorded on Jan 5, 2016.

Sean O'Reilly: So we're talking about share-price performances. I mean, I don't want to say the word "bubble," but just, like, I'm always suspicious when a stock goes up because of something in the news like this. Like right after 9/11, TASER was the stock to own. I don't know, but apparently we can dive in a little bit more here; they've actually been making a lot of money. Real money.

Vincent Shen: Absolutely. Smith & Wesson, we'll talk about them first. They are up almost 200% since the end of 2012. I feel like that time frame in particular is important. That was the last time President Obama, I feel like, made major calls for more gun control.

O'Reilly: Right.

Shen: This was after the Sandy Hook tragedy, of course. In 2013, just ended up being a huge boon year for these companies. Just to give you a little bit of context, the FBI, they have their NICS background check system. While it's not a perfect proxy for gun sales in the U.S., it does give you an idea.

O'Reilly: Ball park.

Shen: Exactly. At least they're trying for example. The system has been in place since 1998. They've been tracking this data, and just to give you an idea ...

O'Reilly: These are people applying to buy guns ...

Shen: Each application could be for more than one, for example.

O'Reilly: OK. All right.

Shen: It doesn't cover all purchases. Some being private-party sales, things along those lines.

O'Reilly: Gun shows, stuff like that. Yeah.

Shen: Five of its top 10 highest days were recorded, the most checks were in late 2012.

O'Reilly: Wow.

Shen: OK, so five of its highest days were in late 2012. By far the biggest week in terms of checks that they've logged, the FBI has logged, was between Dec. 17 and Dec. 23 of 2012.

O'Reilly: Merry Christmas!

Shen: Over 950,000 checks.

O'Reilly: I was about to say, was it a million? How many was it, because I had no idea.

Shen: Nine hundred fifty thousand for that week.

O'Reilly: Wow.

Shen: Then the second record is actually a recent week, from last month. It's like 860,000 maybe. It's a huge difference.

O'Reilly: Right.

Shen: You also have to keep in mind, and we'll touch on this a little bit in terms of the prospects more recently, is the fact that people were talking about Black Friday, biggest day ever in terms of new background checks being submitted.

O'Reilly: Buy one, get one free.

Shen: Smith & Wesson, along with much of the firearms industry, they rode that surge of demand into about 2014. Everybody was worried.

O'Reilly: Yeah, then nothing happened, right?

Shen: No, nothing happened. The stock peaked at about over $16 per share. That was up 90% from end of 2012. Once the panic buying essentially had tapered off, the stores or a lot of the dealers or distributors, they saw their inventory building up quickly because the fears were gone.

O'Reilly: Everybody calmed down. Yeah.

Shen: Exactly. Those quickly rose, and as a result the stock struggled actually and ended up losing almost all of its gains from that prior two-year period in 2014.

O'Reilly: Which is my concern again. I'm just like ... anyway.

Shen: Yeah. The inherent thing that we'll get to later is the volatility of these companies, but not long after it started, the stock bottomed out; six months later, gun control re-emerged as a major political issue in 2015. Especially with the presidential campaigns kicking off for a lot of candidates, 2015 again became a big boon year for this company, where the stock rebounded 132%. For the new year as you've seen, with these executive orders coming down, 2016 is looking very, very good for them as well.

O'Reilly: What were their revenues doing? I took a quick glance, and in these years where the stocks go up, it's like revenue is around 50% year over year in a quarter.

Shen: I'm looking at it quarterly. In 2013 quarters, for example, total revenue up 40% year over year, 26%. Then after that 2013 surge, it quickly subsided. It was down to single digits. Then it fell, so by 2014 you were looking at, like, a 23%, 24% year-over-year drop in revenue. Again, you see ...

O'Reilly: Giving up most of the ...

Shen: You've seen this big swing in demand based on, honestly, not necessarily business fundamentals, but ...

O'Reilly: Fair.

Shen: Exactly. Now the company in its most recent quarter announced its fiscal 2016 second-quarter results last month around this time. It boasted 32% year-over-year revenue growth. Gross margin was up 7.1%.

O'Reilly: This is a growth tech company we're talking about. That's what those numbers are.

Shen: Adjusted earnings were up 150%. Just yesterday, probably contributing to the huge surge day where the stocks up 12%, 13%, the company raised its sales and earnings guidance for the quarter and full year. Fiscal 2016 revenue, which ends in April, I believe, it's expected to come in between $650 million and $660 million, while adjusted earnings will be between $1.36 and $1.41 per share. That represents about 19% top-line growth and 36% bottom-line growth if you use the middle of those ranges compared to 2014. Full year, that is.

O'Reilly: Obviously you've got Sturm, Ruger. Smith & Wesson is kind of a bellwether for industry. How are things looking for them going forward?

Shen: Sure, sure.

O'Reilly: Did you come across anything?

Shen: Looking forward, I think the company honestly it's going to benefit from a lot of this uncertainty around this presidential election, because basically the way it comes down is if you have a Democrat ...

O'Reilly: Right. That's ...

Shen: ... take office ...

O'Reilly: ... one thing that I was about to chime in with. I was like, it's crazy to me sometimes how much a presidential election can affect a stock. I remember I bought the stock because Buffett owned it, but it's USG; this is like my first stock I ever bought. I was 16. They make drywall, it's sheet rock. It's gypsum. They were being sued for $2.1 billion for asbestos litigation. This is the 2004 election. The stock went up double the day Bush got re-elected just because they figured that a Republican administration would be kinder to a company ...

Shen: More business friendly.

O'Reilly: Yeah. I was like, what? I did not anticipate that at all. I'm almost wondering if that's going to happen again in a year with these guys.

Shen: Yeah. People are going to come down really hard lines. Whether or not there will be a time of new regulations depending on the president, it doesn't even matter. It's what's perceived. 2016, until the run-up, until they announce or until the results are announced, there's going to be a lot of uncertainty, and I think the company will benefit from that at least for the next year or two. Then beyond that if you're looking at just more of the fundamental business ...

O'Reilly: It's a coin flip at that point, though.

Shen: Exactly. Consumers though make up about 90% of the Smith & Wesson business.

O'Reilly: Do they sell to the government at all?

Shen: They do have a huge opportunity there to increase some of their selling with government contracts, because ultimately ...

O'Reilly: Ten percent isn't ...

Shen: The U.S. government is still one of the biggest buyers of firearms in this country, if not the largest. That's definitely an area of opportunity for them looking forward.

O'Reilly: Cool. OK, talk to me about Sturm, Ruger.

Shen: OK, so I want you to look at this very closely as a mirror image.

O'Reilly: OK.

Shen: In terms of a lot of that performance in 2013 how things dipped in 2014 and how they've recovered last year, all of that is almost exactly the same. Maybe a shift in terms of the exact timing, but overall very similar. For example, Sturm, Ruger shares gained 17% in 2013, when revenue was up 40% over the previous year. Again, after the fears from the Sandy Hook tragedy. The stock peaked in early 2014, so a little bit earlier than Smith & Wesson. In that year sales fell 21%. Very tough comparisons.

O'Reilly: Yeah, same story.

Shen: Very tough comparisons. The stock plummeted, reversed all of its gains, lost about 60%. More than the gains it made. It lost 60%. In 2015 again it roared back 70% on the surge and demand. Last November the company recorded its third-quarter results. Reported third-quarter results and sales were up 23% year over year to 120.9 million. Earnings per share up 82%. Sound familiar? Its new products, which include all of its major new offerings from the past two years, made about a fifth of total sales in the first nine months of 2015. Obviously ...

O'Reilly: They're still there, yeah.

Shen: ... their product pipeline is coming in. It's doing quite well. It's very popular.

Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Taser International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.