Renaissance Technologies LLC and Cadence Capital Management LLC are among investors to report reduced holdings of weapons makers after the December massacre of school children spurred proposals for stricter gun control.
Cadence, among the 10 largest holders (SWHC:US) of Smith & Wesson Holding Corp. on Sept. 30, liquidated its stake of 1.22 million shares before year-end, filings show. Renaissance, the investment firm that uses computer models to determine trades, disposed of 370,000 Sturm Ruger & Co. shares in the fourth quarter, paring its holding to 2.5 percent from 4.4 percent.
The Dec. 14 slayings of 20 students and six educators at Sandy Hook Elementary School in Newtown, Connecticut, rekindled a debate over gun laws, spurring investors to review holdings in firearms manufacturers even as demand surged to a record. Smith & Wesson and Sturm Ruger, the largest publicly traded U.S. gunmakers, sell military-style weapons that would be banned under proposals by President Barack Obama.
“The headline risk can go either direction” and is greater for investors who own the stocks than for those betting against them, said Craig Kessler, chief investment officer of Kessler Investment Group LLC. “We really could see a material change in the availability of weapons or what is necessary to procure weapons, and that would have a material negative impact.”
Kessler, who oversees about $100 million, said his Columbus, Indiana-based firm sold all of its 9,593 Sturm Ruger shares in the fourth quarter.
Kevin Reid, Southport, Connecticut-based Sturm Ruger’s general counsel, and Cadence Chief Investment Officer William Bannick didn’t respond to requests for comment on the divestitures. Jonathan Gasthalter, a spokesman for East Setauket, New York-based Renaissance, declined to comment, and Springfield, Massachusetts-based Smith & Wesson’s Liz Sharp didn’t comment.
Trading in Sturm Ruger climbed (RGR:US) to 40.2 million shares in the fourth quarter, up from 32.6 million in the preceding three months and 12.4 million a year earlier, according to data compiled by Bloomberg. About 239 million Smith & Wesson shares changed hands (SWHC:US) in the last three months of the year, the most since Saf-T-Hammer Corp., a maker of trigger locks and other gun-safety devices, bought the firm and took its name in 2001.
“The liquidity and the size of the companies is not proportionate to the amount of attention that they’re getting right now,” said Randy Cloud, president of Cloud Capital LLC, which added to its stakes of both gunmakers in the fourth quarter. “There’s been some institutional knee-jerk to dump that stock that probably shouldn’t have happened.”
Sturm Ruger plunged (RGR:US) 15 percent over three trading sessions starting on the day of the Newtown shootings, before rebounding 35 percent through yesterday. Smith & Wesson slid 18 percent during the three days and gained more than 20 percent since.
“These companies have a very strong investment thesis,” said Cloud, whose Tulsa, Oklahoma-based firm oversees about $300 million. “All the political noise will cause enough consternation for investment managers that they won’t make an allocation to it or they won’t make as big of an allocation to it as they might otherwise.”
Public funds across the U.S. are reviewing investments tied to firearms manufacturers. On Dec. 17, California Treasurer Bill Lockyer urged the state’s public pension funds, the two largest in the U.S., to divest holdings of companies that make weapons banned under state law.
Cerberus Capital Management LP, which oversaw $751 million for the California State Teachers’ Retirement System as of March 31, said hours later that it would sell Freedom Group Inc., the maker of the Bushmaster AR-15 semiautomatic rifle used by the gunman and the largest U.S. producer of civilian arms. Calstrs, as the teachers fund is known, said last month it will direct fund managers to begin divesting gunmaker stakes.
“This latest incident, which occurred at a school and involved fellow educators and the children we cherish, is a tipping point for Calstrs and speaks to the correctness of our actions,” Investment Committee Chairman Harry Keiley said in a Jan. 9 statement. “This is not only the right thing to do but positions us to deal with the financial pressures we anticipate this sector of the industry will face.”
Smith & Wesson and Sturm Ruger didn’t meet with fund executives as part of the divestiture process after being invited to do so, Chief Investment Officer Christopher Ailman said last week.
Calstrs still held 135,845 Smith & Wesson shares as of Jan. 11, according to a letter Ailman sent to Chief Executive Officer James Debney. The pension fund held a 0.2 percent stake (RGR:US) in Sturm Ruger as of Dec. 31, data compiled by Bloomberg show.
The larger California Public Employees’ Retirement System will review whether to sell investments in gunmakers totaling about $5 million at a Feb. 19 board meeting, according to the fund’s website. Calpers, with about $255 billion in assets, increased its holdings in Sturm Ruger and Smith & Wesson in the fourth quarter, and the stakes were worth a total of $6.95 million at year-end, according to data compiled by Bloomberg.
The New York State Common Retirement Fund sold all of its holdings in Smith & Wesson through an outside manager on Dec. 18 and will freeze its investment of 45,325 Sturm Ruger shares, which it owns through an index fund, “for an indefinite period,” according to a Jan. 15 statement. The stock climbed 14 percent since then through yesterday.
“After the terrible events in Newtown, it is clear that the national movement toward greater regulation of firearms manufacturers will impose significant reputational, regulatory and statutory hurdles that may affect shareholder value,” State Comptroller Thomas DiNapoli said in the statement.
Not all investors who divested shares of gunmakers in the fourth quarter were spurred by the Newtown slayings. Gary Stroik, chief investment officer at WBI Investments Inc., said his firm liquidated its Sturm Ruger shares by Dec. 11 amid a slump in the stock price, after acquiring the stake in June.
“We bought it because it really looked like a good value at the time,” said Stroik, who oversees about $1.6 billion at his Little Silver, New Jersey-based firm. “We always put a stop under it in case things start to deteriorate. Clearly, they did.”
Sturm Ruger slipped 17 percent from Nov. 30 to Dec. 11, when Stroik sold the shares. Stroik said he may look at buying stock in the company again.
Gunmakers may benefit from an earnings surge fueled by a firearms buying spree ahead of potential restrictions. Pre- purchase background checks hit a record high in December, climbing almost 59 percent from a year earlier to 2.2 million, according to federal data adjusted by the National Shooting Sports Foundation to eliminate checks not related to sales. The organization is based in Newtown.
Smith & Wesson’s profit for the fiscal third quarter ended Jan. 31 may more than triple to $14.1 million from a year earlier, while Sturm Ruger’s net income (RGR:US) for the period ended Dec. 31 may climb 50 percent, according to the average of estimates (SWHC:US) by analysts in a Bloomberg survey.
Investors who sell the shares “are nuts,” Cloud said. “It’s kind of money in the bank.”
For others, like Kessler, the risk is too great. His firm bought Sturm Ruger shares in January 2012 to take advantage of escalating sales around Obama’s re-election and expectations for stricter gun laws, he said. Kessler said he exited the position on Nov. 8 when it appeared that “the euphoria surrounding gun ownership really could not get any more publicized.”
While Kessler weighed buying the shares again, the Newtown shootings dissuaded him.
“That changed the dynamics of the investment,” he said. “This was an opportunity for us to simply cash in on a profitable investment and avoid the potential for a broader government involvement that we really couldn’t put a value on.”
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