Thu, 24 Sep 2020

Background checks for gun buyers have risen for 13 straight months, with more recent levels showing "unprecedented" strength and demand-drivers in place to continue the trend through fall, according to Lake Street Capital Markets LLC.

The checks for repeat buyers or first-time gun owners jumped 75% in May on an adjusted basis compared with a year earlier. It was the third straight month to see growth of that magnitude - checks rose 80% in March and 69% in April. The data show a significant increase from the adjusted gains of 19% and 17% in January and February respectively.

The latest surge is probably driven by "unfilled demand from Covid, recent buying due to civil unrest and continued and perhaps heightened buying due to the upcoming election and potential for increased regulation following the election," Lake Street analyst Mark Smith wrote in a note Tuesday. The last two items will drive "continued demand in June and through the fall," he said.

Others on Wall Street agree. Cowen's guns and ammunition analyst Cai Von Rumohr told clients that while virus lockdowns are starting to ease, demand for guns may "remain strong as civil unrest increases with the George Floyd protests." Near-term firearms demand probably also would be "bolstered" if the election prospects for Democratic presidential nominee Joe Biden strengthen, given the party's "more restrictive stance on gun control."

Shares of gun makers Sturm Ruger & Co. and Smith & Wesson Brands have soared 14% and 25%, respectively, in the past two days. They've also outperformed the broader market over the past 13 months, with a strong surge coming since mid-March. That correlates with meaningful year-over-year gains in adjusted background checks of 80% in March, 69% in April and 75% in May. That's a significant jump from the adjusted gains of 19% and 17% in January and February respectively.

Democratic odds

Gun stocks have typically been volatile in response to changing political and regulatory pressures. AGF Investments Chief US Policy Strategist Greg Valliere said on Monday that "we think - as of now - that the Democrats are within sight of controlling the House, the Senate and the White House."

US president Donald Trump "surely must know that he's on the ropes, with unemployment likely surging to nearly 20% this Friday, with his toothless China policy generating yawns last Friday, with the virus potentially re-igniting, and now with urban riots," Valliere wrote.

Meanwhile, "Biden has stepped up his game in recent days," showing he has "empathy and leadership as Trump poured gasoline on the flames with talk of 'vicious dogs' to sic on protesters," the strategist said.

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