Lower price of the AR-15 rifle; Is this gun a good investment?
“Price is what you pay; value is what you get. Whether we’re talking about socks or inventory, I like to buy quality merchandise when it’s marked down.”
In fact, do that “whether it’s socks, stocks … or semi-automatic AR-15 rifles with polycarbonate stocks”. Because today, dear investor, we are going to take a short break on the subject of investing in equities (even if it is our favorite subject), to speak rather of investing in fire arms.
Specifically, the AR-15 rifle.
Investing in Firearms: The Myth …
You may have heard stories of how some lucky people make their fortunes investing in guns. To cite just one recent example, in April 2014, a .45 caliber revolver that once belonged to Wyatt Earp – which probably cost around $ 20 when it was made in the 1800s – was auctioned off for the princely sum of $ 225,000. Whether there is a profit of 1,124,900%, or a very respectable annualized return on investment of 7%, from the deemed date of purchase.
So what are the odds that an investor in more common guns like the AR-15 rifle, which sells for $ 800 or less, will make something like that kind of profit?
… and reality
Truth be told, profits like those made in the Wyatt Earp Revolver Auction only occur once every 150 years. Typically, weapons like the AR-15 are bad investments for one simple fact: unlike earth or gold, these weapons are not in finite supply.
Traditionally, real estate investors have presented investments in land as safe because “God does not do it anymore.” Gold investors can, of course, make similar claims. (And do.) And of course the handguns belonging to Wyatt Earp are like land and gold in that they are limited in quantity – which explains the high price reached in the April auction. In this regard, singular firearms such as Earp’s revolver may well be good investments.
However, stockpiles of common firearms like the AR-15 are constantly being replenished. Indeed, Colt, Smith & Wesson (NASDAQ: SWBI), Glock and Sturm, Ruger (NYSE: RGR) more and more weapons can be reliably expected to be produced each year. And therefore, even if the demand for the AR-15 is strong, it will not necessarily translate into a higher price for the rifle. On the contrary, gunmakers will do what they do best: make more guns!
The data provided to me by the right people at BudsGunShop.com – one of the largest new and used firearms retailers on the internet – describes the fluctuations in the retail price of a popular AR-15 rifle that Bud’s has been selling since 2007.
This shows that in 7½ years of sales, the average price of an AR-15 rifle has practically come full circle. From $ 798.85 in March 2007, it shot up to $ 1,199 (following the election of President Barack Obama for a second term), then plunged below $ 600 (when that re-election didn’t did not result in a new assault weapons ban), only to end at $ 786 earlier this month.
It’s a pretty rocky road – and a long way to go to end up with virtually zero profit on your AR-15. (In fact, a loss of about 2% as the price of the AR-15 rifle is now $ 12.85 below the March 2007 level).
Now take a look at some stock charts for the two biggest publicly traded gunmakers, Smith & Wesson and Sturm, Ruger, and see if you can spot the difference:
The S&W stock chart (the yellow line) shows roughly the same results we see for Bud’s AR-15 model – seven years of highs and lows, ending with a stock price slightly below its starting point. Sturm, Ruger, on the other hand, generated huge returns for his investors – up to eight times the profit at its peak earlier this year, and still an impressive quadruple return at recent prices. As a result, investors in Sturm, Ruger have outperformed investors in Smith & Wesson – and investors in AR-15 rifles – quite easily over the years.
The result for investors
Does all of this mean that you should never invest in firearms? Barely.
In fact, the impressive price movement of AR-15 rifles between October 2012 (before Obama’s re-election) and March 2013 (more than a month after his second inauguration) suggests that if you are buying a popular firearm such as the AR-15 – and buy it at the right price at the right time – you may make a good profit if you sell it at the right time.
Let’s say the upcoming 2016 elections feature a presidential candidate more dedicated to gun control than Obama turned out to be – or the potential for more Democrats in Congress. (After the 2014 results, there could hardly be less.) The prospect of tighter gun control might worry people again – maybe even enough to cause the prices of AR-15 rifles to rise another 50% in six months.
Again, as we saw after the election, these benefits can quickly evaporate when the risk does not materialize. And in the long run, it seems there is more profit to be made – and more consistent, growing profits … and dividends – by investing in stocks of quality firearms manufacturers like Sturm, Ruger, than by trying to invest in the products they make, like the AR-15 rifle.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.