Gun Owners and Gun Manufacturers: Happy Independence Day!

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

– Second Amendment to the U.S. Constitution

There are over 550 million firearms in worldwide circulation. That’s one firearm for every twelve people on the planet. The only question is: How do we arm the other 11?

– Yuri Orlov, Lord of War

Well, here’s my first question: Do you think it’s a little dangerous handing out guns at a bank?

– Michael Moore, Bowling for Columbine

This past Monday (June 28^th), the U.S. Supreme Court, in a 5-4 decision, struck down a City of Chicago ordinance that banned private residents from possessing handguns.  The decision extended to the states what had previously been applied to the District of Columbia almost exactly two years ago. Specifically, the Court ruled that individuals have a “fundamental right” to own handguns in the home for purposes of self-defense.

Not surprisingly, the stocks of the two publicly-traded U.S. gun manufacturers jumped on the news; Smith & Wesson (NasdaqGS: SWHC) rose 5.6% and Sturm, Ruger (NYSE: RGR) was up 2.2%. Smith & Wesson released full-year 2010 and fourth-quarter earnings on Wednesday that I will talk about shortly, but first I need to give my take on the Court decision.

It’s bad legal analysis, a dangerous attack on public safety, and a shocking example of judicial activism by a supposedly “conservative” Supreme Court.

Legal Analysis of a Horrible, Anti-Democratic Court Decision

The prefatory clause of the Second Amendment expressly tells you its purpose: “A well regulated Militia ….”  All words that come afterwards must be related to this purpose. Consequently, the operative clause – “right of the people to keep and bear arms” – is only a right in so far as it furthers the purpose of a militia. And what is the purpose of a militia?  As Justice Stevens wrote in his Chicago dissent (p. 34, n.3):

The Court badly misconstrued the Second Amendment in linking it to the value of personal self-defense above and beyond the functioning of the state militias; as enacted, the Second Amendment was concerned with tyrants and invaders, and paradigmatically with the federal military, not with criminals and intruders.

Even Justice Scalia, who wrote the D.C. decision two years ago, admitted that the reason the founding fathers added the Second Amendment to the Constitution was to protect the independence of state militias, not to further personal self-defense (pp. 24-26):

There are many reasons why the militia was thought to be “necessary to the security of a free state.” First, of course it is useful in repelling invasions and suppressing insurrections. Second, it renders large standing armies unnecessary. Third, when the able-bodied men of a nation are trained in arms and organized, they are better able to resist tyranny.

It is therefore entirely sensible that the Second Amendment’s prefatory clause announces the purpose for which the right was codified: to prevent elimination of the militia. . . . The threat that the new Federal Government would destroy the citizens’ by taking away their arms was the reason that right – unlike some other English rights – was codified in a written Constitution.

But Scalia refused to stop there. On pp. 19-21, he said that the Second Amendment also protected a “pre-existing right” of individual self-defense based on our British heritage. Specifically, he refers to England’s 1689 Declaration of Rights in which William & Mary guaranteed the rights of Protestants to bear arms.  Scalia admits that it was a right only enforceable against the Crown (not Parliament) and was only afforded to Protestants (not Catholics), but he says it “was clearly an individual right, having nothing whatever to do with service in a militia.”

Personal aside: whenever someone couches his argument in terms of “clearly” or “obviously” it usually means that his argument is weak.

In other words, Scalia’s ruling that the Second Amendment is a personal right of self-defense rests on his personal interpretation of British history. But Scalia is not a professional historian. Justice Breyer’s dissent in the just-released Chicago decision notes that a group of actual British historians filed a brief which argued that the 1689 Declaration of Rights had everything to do with protecting the right of Parliament to arm militias against Catholics and foreign invaders and nothing to do with individual self-defense. In fact, private persons in England could possess weapons “only as allowed by law.”

Guns Don’t Kill People, But They Make it Much Easier for People to Kill People

Furthermore, Scalia stated that handgun bans are unconstitutional even if other types of firearms – such as rifles and shotguns – are permitted. Why? Because handguns “are the most popular weapon chosen by Americans for self-defense” (pp. 57-58).   Since when are guns the only means of self-defense and since when does popularity determine constitutionality? Handguns are also popular with murderers because they are easy to conceal. As Justice Stevens writes (pp. 35-36):

Just as they can help homeowners defend their families and property from intruders, they can help thugs and insurrectionists murder innocent victims. The threat that firearms will be misused is far from hypothetical, for gun crime has devastated many of our communities. Approximately one million Americans have been wounded or killed by gunfire in the last decade. Urban areas such as Chicago suffer disproportionately from this epidemic of violence. Handguns contribute disproportionately to it. Just as some homeowners may prefer handguns because of their small size, light weight, and ease of operation, some criminals will value them for the same reasons. In recent years, handguns were reportedly used in more than four-fifths of firearm murders and more than half of all murders nationwide.

Hence, in evaluating an asserted right to be free from particular gun-control regulations, liberty is on both sides of the equation. Guns may be useful for self-defense, as well as for hunting and sport, but they also have a unique potential to facilitate death and destruction and thereby to destabilize ordered liberty. Your interest in keeping and bearing a certain firearm may diminish my interest in being and feeling safe from armed violence. And while granting you the right to own a handgun might make you safer on any given day, it may make you and the community you live in less safe overall, owing to the increased number of handguns in circulation. It is at least reasonable for a democratically elected legislature to take such concerns into account in considering what sorts of regulations would best serve the public welfare.

Bottom line: Scalia’s misinterpreted British history and engaged in judicial activism by adding a private right of self-defense via handguns that is far beyond the plain meaning of the Second Amendment’s focus on militias. The people of DC wanted to protect their families from gun violence and voted for political representatives that would enact laws to do just that. But Scalia has removed gun violence from the democratic process, stripping public safety functions from democratically-elected legislatures.  

Compounding the Legal Error 50-Fold

But at least Scalia’s decision was limited only to negating gun laws imposed by the federal government. In the Chicago decision, Justice Alito compounded the error 50 times over by expanding its anti-democratic principles to all 50 states. The Bill of Rights in the U.S. Constitution applies only to laws enacted by the federal government. Historically, The Supreme Court has only extended portions of the Bill of Rights to state action (via the Fourteenth Amendment’s due process clause) if the right in question is “fundamental” to human liberty. For example, the Fifth Amendment provides criminal defendants the right to a grand jury indictment, yet the Court has never forced state courts to honor this right because it is not deemed fundamental to justice. Yet, Alito bootstraps Scalia’s misreading of history that recognizes a personal right to bear arms for self-defense to – and this is the killer – label this non-existent right as “fundamental” (pp. 21, 40).

This is judicial activism of the worst sort. I never want to hear conservatives criticize the Court for “legislating from the bench” ever again. Conservative justices have demonstrated that they legislate better than anyone. As Justice Stevens writes in dissent (pp. 24, 43, 55-57):

Recognizing a new liberty right is a momentous step. It takes that right, to a considerable extent, “outside the arena of public debate and legislative action.”

The reasons that motivated the framers to protect the ability of militiamen to keep muskets available for military use when our nation was in its infancy have only a limited bearing on the question that confronts the homeowner in a crime-infested metropolis today.

The net result of Justice Scalia’s supposedly objective analysis is to vest federal judges with unprecedented lawmaking powers in an area in which they have no special qualifications, and in which the give-and-take of the political process has functioned effectively for decades.

Today’s ruling marks a dramatic change in our law and the Justices who have joined it have brought to bear an awesome amount of discretion in resolving the legal question presented by this case.

I would proceed more cautiously.

Amen. Stevens’ dissent in the Chicago decision marks his last act as a Supreme Court justice prior to his retirement. I can’t think of a better way to go out than as a beacon of judicial restraint and defender of democracy. Congratulations Justice Stevens and enjoy your retirement!

Smith & Wesson Earnings

Oh yeah, let’s talk about my good friends, Mr. Smith and Mr. Wesson. The gun maker, which is headquartered in Springfield, Massachusetts (birthplace of children’s author Dr. Seuss, wine connoisseur Robert Parker, LSD hippie professor Timothy Leary, actor Kurt Russell of Backdraft and Escape from New York fame, and near my hometown of Northampton), reported fourth-quarter results that beat analyst estimates on revenues by 5.6% ($103.8 million v. $98.3 million est.) and adjusted earnings by 86% ($0.080 per share v. $0.043 est).  For the full year, the company grew sales by 21.3%, the fifth consecutive year of double-digit percentage sales increases.

More importantly, future guidance is rosy. The company reported that its order backlog increased to $143.1 million, up 23% from the prior quarter.  Apparently, its BodyGuard line of personal protection handguns with integrated laser sights are selling like hotcakes.  Handguns? Personal protection? Sounds like a product that is a clear winner based on the Supreme Court’s Chicago decision. For fiscal year 2011, the company sees sales of between $430 million and $445 million, which are higher than prior analyst estimates of $424 million.

Looking at valuation, Smith & Wesson looks cheap at 7.4 times earnings, but Sturm, Ruger also looks cheap and has better growth with less debt:

Source: Bloomberg

Over the past decade, Smith & Wesson has outperformed the S&P 500 by a massive 320 percentage points:

But the company has lagged the S&P over the past three years by 51 percentage points:

Source: Bloomberg

With the Supreme Court’s Chicago decision, I’m pretty sure this recent underperformance is a thing of the past. Not just for Smith & Wesson, but for Sturm, Ruger too.

Happy July 4th!

Speaking of Springfield’s Kurt Russell, isn’t Snake Plissken the greatest movie name ever?

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