Traders are betting big against gun stocks (RGR, AOBC)

Short
sellers are adding to bets that gun stocks will
drop.
David Becker/Getty
Images

A strange and unexpected thing happens to gun stocks after a mass
shooting: they go up.

It adds a perverse twist to an already terrible situation, as
firearm enthusiasts race to stockpile weapons out of fear that
gun control legislation will hamper future purchases.

It also exposes the dirty truth of gun stocks: rather than moving
on more traditional fundamental factors, their direction is often
largely dictated by developments in the ongoing gun control
debate.

That dynamic is playing out right now across the space. After
spiking following the recent Las Vegas massacre
— which left 58 people dead — stocks of gun producers like
Sturm Ruger and
American Outdoor
Brands (which owns Smith & Wesson) have erased those
gains amid speculation that no legislative efforts are imminent.

In fact, the possibility of heightened gun control is viewed as
so unlikely in the immediate term that traders are piling into
bets that these stocks will continue to fall.

Average shorting activity in the space has jumped by 10% since
early July, according to data provider IHS Markit. On a single-stock basis,
the firm finds that
Sturm Ruger has over 25% of its shares shorted at present time,
while Outdoor brands has also seen a “sharp rise” in shorting
activity.

“This slump hasn’t gone unnoticed by short sellers, and they have
been busy adding to their positions since last November,”
said Simon
Colvin, an equity and credit markets analyst at IHS
Markit. “Last week’s tragic events did little to dent resolve in
the trade, and these two stocks saw the demand to borrow their
shares climb to the highest level in over three months.”

The chart below shows just how much short interest — or
bets a stock will fall — in American Outdoor Brands has surged in
recent days. The uptick is particularly interesting when you
consider that the stock is already sitting close to a 2 1/2-year
low.

IHS
Markit