Talk of Gun Laws Spurs Irrational Exuberance

NEW YORK ( TheStreet) -- If you've been to a Wal-Mart ( WMT) lately, or to your local sporting goods retailer, or gun shop, you may have noticed that there are some pretty bare shelves in parts of these stores; namely where the ammunition, and/or guns are usually found.

I've witnessed it myself on several occasions, and heard similar stories from others. The current run on guns and ammo that occurred as a result of fear of stricter firearms laws in this country is unprecedented. The tragic, horrifying mass shootings we've experienced recently led some politicians, including the current administration, organizations, and private citizens to demand stricter gun laws and regulations, some of which have already gone into effect, in New York, to name one.

Whether or not you are a supporter of the Second Amendment, the irony in all of this is quite clear. When the citizens of a free society believe that their rights are in jeopardy, in this case gun ownership, there is a run on that which they fear will be taken away. During the Depression, there were runs on banks as depositors feared there savings would be lost. Now there's a run on guns and ammunition.

All of the rhetoric of proposed tougher laws and restrictions has achieved one of the very things that some gun opponents fear most. America is arming itself like never before. This will continue until either the issue fades or broader legislation is actually passed which appears unlikely. It's a basic issue of supply and demand. Right now, the supply can't keep up.

If tomorrow, there was chatter about making donuts illegal as part of some healthcare initiative, you better believe there would be a run on Krispy Kreme ( KKD), Dunkin ( DNKN) and Tim Hortons ( THI) stores. The stocks, of course would be crushed, at least in the short-term, but there would be doughnut frenzy. Then the fervor would die down, once the public at large realized that there are simply not enough legislators that would vote to outlaw doughnuts.

Bad example, perhaps, some will say that the difference is "doughnuts don't kill people, but guns do." But the point is clear; at least I hope it is.

Indeed, after the Newtown, Conn., tragedy, companies associated with guns saw their stocks fall precipitously. Cabela's ( CAB) shares fell about 20% between the beginning and middle of December, but have since risen 40%, and are once again near all-time highs.

The story is similar with Dicks Sporting Goods ( DKS). Gun manufacturers, not surprisingly, were hit harder. Sturm, Ruger ( RGR) shares fell about 33%, and have since gained back much of that ground. Smith & Wesson ( SWHC) shares fell nearly 30% and have since risen 27%.

DKS Chart DKS data by YCharts

Institutional investor reactions are all over the map. The California State Teachers Retirement System reported in January that it would divest itself of the $2.9 million worth of Sturm Ruger and Smith & Wesson that were part of index fund holdings. But yesterday, New York City's police pension announced that it is hanging on to the nearly $10 million it has invested in ammunition manufacturers Alliant Techsystems ( ATK) and Olin ( OLN). That's one of the beauties of our system; private and institutional investors can vote through purchase or divestment.

It's an emotional issue, no doubt, and one where opinions on either side are very strong. But there's also a lesson in economics, and of supply and demand embedded within, and it has universal application in a free society. If you want to create a stir, a frenzy among the citizenry, threaten to take something away. That may be obvious but it's yet another example of the fact that there are a whole bunch of folks in Washington who don't have a clue about economics.

At the time of publication the author held long positions in KKD.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.