Background Checks Rise, But Still Compressed

Although not a commonly used indicator, US background checks for firearm purchases can be interpreted as a gauge of sentiment and the view of Americans on the current state of the geopolitical environment. At times of ease, background checks can be expected to decline, whereas a volatile situation (ie the onslaught of COVID, the summer of riots, etc) or concerns over more stringent gun legislation often lead to increased firearm purchases. In March, background checks ticked higher by 20.6% month over month. However, on a y/y basis, background checks are still down by 34.3%, as illustrated in the chart below. On a year-to-date basis, background checks are down a similar 33.9%. In March, a total of 3.1 million background checks were run for Americans looking to purchase firearms.

Monthly background checks remain well above their historical trend, despite the y/y compression. In the near term, it is possible that checks bottomed out last month at 2.6 million. Long story short, although checks are down significantly y/y, the long-term uptrend that was in place prior to the COVID surge is still largely in effect.

Although we like to think that the market is forward-looking, the price action of gun manufacturer Sturm Ruger (RGR) tends to be highly correlated with the number of background checks over the prior twelve months. Since the turn of the century, total trailing 12-month total of background checks and the monthly price of RGR have held a correlation coefficient of 0.90, which indicates a strong positive relationship. Should background checks tick higher, RGR has room to benefit.

Looking at the two different publicly traded firearms manufacturers, the chart patterns for each look quite different. Whereas RGR has been in a short-term uptrend, Smith and Wesson (SWBI) has been trending lower for several months now, despite a positive federal court ruling in regards to turning over research data and advertising research to the NJ Attorney General just three weeks ago. Nonetheless, this goes to show that, even though these companies are exposed to the same secular trends, near-term performance can and will diverge due to company-specific exposures. Click here to try out Bespoke’s premium research service.