Following the tragic mass shooting in Las Vegas this week, gun and ammunition manufacturers have rallied as Americans shop for weapons before possible gun control legislation makes them harder to buy. But the rally could stoke short sellers, S3 Partners managing director of predictive analytics Ihor Dusaniwsky said, if history holds true.
American Outdoor Brands Corp. (AOBC) - Get Report , formerly Smith & Wesson, has gained 5.6% since Monday's massacre. Sturm Ruger & Co. Inc. (RGR) - Get Report has risen 2.4% at the same time. "The possibility of increased regulations or outright bans on the purchase of certain guns and ammunition may prompt an increase in gun sales prior to any prohibitive federal or state regulatory is implemented," Dusaniwsky said.
While the surge in sales could augment fourth quarter results, it could weaken 2018 sales as future demand is pushed forward to 2017 instead of 2018 purchases. Dusaniwsky said American Outdoor Brands, Sturm Ruger, Vista Outdoor Inc. (VSTO) - Get Report , Olin Corp. (OLN) - Get Report and Orbital ATK Inc. (OA) are the largest companies to be affected by such a move.
When that happens, shorts will hop in at the end of the short-term rally, just as they did last year.
By the end of 2016, short interest on gun and ammo companies surged 108% fearing an anti-gun president would be elected and gun and ammo sales would bottom out with increased regulation. Short sellers covered almost 25% of their exposure, though, after Second Amendment-friendly President Trump was elected.
"Short sellers will sell into the tail end of this rally, hoping to catch the price reversal if these regulations actually materialize," Dusaniwsky said. "Shorts are hoping this strategy works better than in 2016 and 2017 when, although short interest increased dramatically, average returns for the five gun/ammo stocks was +1.45% and +5.44%, respectively. Shorts were down $80.4 million in mark-to-market losses in 2016 followed by $71.7 million in mark-to-market losses so far in 2017."
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