Guns, Money, and Regulations

If you’re looking for free drinks and new friends, loudly discuss your support for the Second Amendment. If you’d rather engage in colorful discourse and potentially continue the conversation outside, bring up your views of much-needed gun control and the possibility that the framers of the Constitution didn’t mean for every house to have the right to an AR-15.

The two sides of the coin point out something that will play out across the nation as we close in on the elections next year. Regulations matter, and gun control is a great example.

It might not get points for style or sensitivity, but there was a quip during President Obama’s tenure that he was “the best gun salesman in America.” Every time he started a conversation about gun control, gun sales shot to the moon. Consumers reacted by purchasing more weapons, hoping to get ahead of any new regulation, while gun retailers happily banked sales and profits. When the conversation faded, so did sales.

Popular gun brand Smith & Wesson rode the wave of sales ever higher during Obama’s tenure. The company’s stock went from $3.83 in February 2009, just after Obama took office, to $9.55 at the beginning of his second term. By the fall of 2016, when the world thought Hillary Clinton would take the helm, Smith & Wesson’s stock reached $23.33, a 500% gain from where it began in February 2009.

Along the way, Smith & Wesson used its newfound wealth to diversify its offerings. The company purchased hunting equipment and accessory maker Battenfield Technologies in December of 2014, then picked up laser-sight firm Crimson Tracer in August of 2016. Smith & Wesson also purchased Taylor Brands, a knife maker, and UST brands, a survival gear company.

All signs pointed higher, driven by political and regulatory worries. On the day before the election in 2016, Smith & Wesson changed its name to American Outdoor Brands, probably hoping to continue selling weapons while beginning to distance itself from the business, at least in name.

Then Trump surprised the nation.

The Story of a Stock

By February 2017, American Outdoor Brands’ stock had fallen to $19.44, a 17% decline from November 1, 2016, just before the election, and things haven’t gotten better. With Trump in office, Americans didn’t feel the same urgency to buy a gun as they did when Obama sat in the Oval Office.

Trailing 12-month revenue dropped from a high of $900 million in early 2017, to $606 million by April 2018, and then $639 million in April of this year. Sales remain about 30% lower than the recent high, and about where they were in January of 2014, before the company acquired the other firms.

The shares recently traded at $8.38, a 64% drop from where they were in 2016, and just 120% higher than where they started in February 2009. In that same time, the S&P 500 increased by 450%. The broad market indices are marching higher, and American Outdoor Brands continues to fade.

But don’t worry, the company has a plan. To battle the challenging sales environment, the company is splitting up what it just recently brought together.

To make itself more attractive, the firm recently announced it will cleave off the Smith & Wesson side into the stand-alone gun business that it had been before it went on a buying spree earlier this decade.

It’s hard to argue that Americans needed more guns before 2016, or need fewer today. Consumers, as well as businesses, reacted to political and regulatory changes under both administrations, and now American Outdoor Brands is positioning itself for what it sees on the horizon. If a Democrat takes office in 2021, the company will have put some space between itself and guns.

The path of Smith & Wesson, then American Outdoor Brands, and now Smith & Wesson again, is a simple example of what goes on throughout the economy every day, from our pocketbooks all the way to the boardrooms of American companies. We react to our environment, trying to position ourselves the best we can.

American companies, not including American Outdoor Brands, have had a great few years since Trump took office, reduced regulations, and cut corporate tax rates. But they haven’t significantly increased their business investments, and the U.S. deficit will top $1 trillion this year. As we look into 2020 and beyond, we should consider how things might change on the corporate landscape with the coming elections.

2020’s Up for Grabs

It’s not just the Oval Office that’s in play. Every seat in the House is up for grabs, and many seats in the Senate. If the next group of legislators aren’t as business-friendly as President Trump, companies could end up with lower profits, and less money to spread around through dividends and stock buybacks, and much higher costs in the form of regulations. If any of that comes to pass, it could take a bite out of the equity markets just as we deal with a global economic slowdown.

As 2019 comes to a close, consider how your main stock holdings will fare if things change dramatically in the upcoming election. You don’t want to be left holding the stock of a company when the best salesman and his party get voted out of office.

P.S. If you missed Adam O’Dell’s presentation earlier this afternrnoon where he revealed his favorite market-timing strategy and the next opportunity he sees right around the cornrner, click here to catch a re-broadcast.