Jim Armitage: Shares in assault rifle makers among the most bet-against on Wall Street

Outlook Shell oil employees beware: your pension fund’s investment in that great peddlar of deadly weapons, Smith & Wesson, is coming under attack.

Shares in the maker of assault rifles used in US massacres like the Aurora cinema slaughter have become one of the most bet-against on Wall Street. That’s bad news for other UK shareholders like the funds run by Barclays and RBS too.

And it’s not only Smith & Wesson that’s under fire. Shares in Sturm Ruger – the biggest maker of machine guns, rifles and pistols in America, have also been battered by Wall Street’s “short-sellers” – people who take big bets that shares are going to fall. Once again, those great moral ambivalents, the Shell pension fund, RBS and Barclays are investors in the company’s shares.

Shed a tear.

The reason for all this short selling initially seems perverse, but it’s also logical. After the 2012 Newtown primary school massacre (20 children, six members of staff killed), gun nuts flocked to their hardware stores to tool up, fearing Barack Obama would bring in new weapons legislation. Machine guns (rebranded “assault rifles” by the industry’s marketing men) were particularly popular as they seemed most likely to be curbed.

Clever investors realised this sales surge was likely, because the same thing happened last time there was a clampdown, in 1994. So, as the firearms makers’ shares fell in the immediate aftermath of Newtown, the savvier punters loaded up.

They all got rich. Sales went wild and the share prices rocketed.

The trouble with this play was that it was always going to be a short term success only. After all, even the most ardent gun nut only needs to stockpile once. Now, most have sated their appetites. Their rifle cabinets are brimming. As a result, with more than 90 guns per every 100 Americans, sales – and shares - are now collapsing.

Both Sturm Ruger and Smith & Wesson recently shocked investors with news of collapsing sales. Smith & Wesson said demand for “long guns” had collapsed 67 per cent.

This appears even worse than the after effects of the curbs of 1994, when sales of guns fell by a third over the initial surge.

According to data from the Markit research group, Sturm Ruger has seen a 25 per cent surge in the amount of short selling against it since its poor results five weeks ago, while Smith & Wesson’s share price has tumbled a quarter since June.

Some of the shorts got in too early and were badly wounded last year, much to the glee of the long term shareholders who aren’t laughing now.

Not all shareholders waited around to get burned, though. The maths phds at the British computerised trading fund Oxford Asset Management for one. Their algorithms sold Oxford’s entire 240,000 shares stake in Smith & Wesson near their peak earlier this year, booking a $1m profit since Newtown.

What you might call making a killing.