By Peter Mastrantuono
Fueled by COVID-19 anxieties and fear of civil unrest, background checks for gun purchases soared to nearly 3.7 million in July. It was one of the biggest months ever for FBI background checks.
With gun sales near all-time highs, it begs a logical question: Should gun manufacturing stocks be part of my portfolio? It should be noted from the outset that most gun manufacturers are privately owned, leaving individuals with a very short list of gun manufacturers in which to invest.
With that said, increasing sales are usually one good indicator of a company’s investment potential. And, increasing gun sales have translated into solid year-to-date price performance for the two publicly traded gun manufacturers.
Yet, investing in gun manufacturers probably requires a bit more than the typical financial analysis that an investor may apply to a consumer staple stock or technology company. In addition to normal security analysis, individuals considering a long-term investment in gun manufacturers will need to consider a number of factors, including:
- Social and Political Considerations: The random and much-too-frequent mass shootings tend to depress gun manufacturers’ stock prices as fears are raised over increased regulation and liability losses following such events. The retreat in stock prices tends to be a short-term phenomenon, but gun violence does add to the pressure for a political response that may involve higher hurdles for being able to buy guns in the future.
- ESG Considerations: The employment of environmental, social and governance (ESG) considerations in the investment decision-making process has become increasingly widespread with large institutional and mutual fund money managers electing to avoid investments in companies they deem to have deleterious impact on the environment, behave in a socially irresponsible manner or are poorly governed by their company board.
Gun manufacturers are broadly excluded from the universe of permitted investments for funds and managers that follow ESG principles. Eschewing such stocks can leave a gaping hole in investor demand, creating a structural obstacle to future price performance.
All is not doom and gloom, of course, for the future of gun manufacturers. Their product is legal and, given the high levels of ownership, relatively safe. While a ban on gun ownership would be highly destructive to the future of these companies, prohibiting private gun ownership seems a remote risk, however catastrophic banning guns would be for gun companies.
As this year has shown, consumer demand for gun products is high and could potentially grow higher still, presenting a path to greater profitability for gun manufacturers and concomitant price improvement for gun manufacturers’ stocks.
Continued growth of sales may be dependent on ephemeral factors like social or political fears, but, for now, they remain supported by fundamental cultural factors that still value guns for reasons that range from hunting to personal protection.
For the investor, he or she will need to decide whether their risk tolerance is comfortable with such uncertainty or whose personal values permit ownership of such companies. In any case, it pays to discuss such investments with an experienced financial advisor to get an objective perspective.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.