What to Do When Panic Buying Begins

Most people would consider Claypool Hill, Virginia, a typical U.S. town.

It is home to 1,912 folks. It's situated about halfway between Lexington, Kentucky and Richmond Virginia.

Unemployment is just under 7%. The town's crime rate is right in line with national averages according to FBI statistics. There's a Best Western there too.

It would seem like the most average place in the country…unless you stop by Trader Jerry's at the corner of Taylor and Honeyrock. Jerry Cochran, proprietor or Trader Jerry's, says he's experienced a "big increase" in business. He says he's facing a significant "shortage" of merchandise while his customers are "hoarding" all available supply.

Sounds like Jerry's doing pretty good business. What does Jerry sell, you ask?

He's not in the swine flu vaccine game or anything like that - although that would have been good.

He doesn't sell gold coins either - that "micro-bubble" where coin dealers were getting 15% to 20% premiums on their inventories has run its course as well.

Jerry sells guns and ammo. And right now Jerry's business is booming. A surge in demand has caused gun prices across the country to nearly double. When it comes to ammo, Jerry has run out - just like thousands of others.

The guns and ammo boom is alive and well. And if we pay close attention, it's easy to see where the real opportunity is. As usual, it's not where most folks are looking.

The guns and ammo boom is no secret. Ever since the first Wednesday of November 2008, guns and ammo have been flying off the store shelves.

The sales surge has unleashed the creative headline makers at virtually all media outlets.

ESPN claims, "The Ammo Boom is No Dud."

The Bluefield Daily Telegraph states, "Ammunition Shooting Off Retailers' Shelves."

The Lawrence Journal says, "Worried Gun Owners Trigger Shortage in Bullets, Rise in Price."

They aren't overhyped reports just to make "news" though (swine flu, anyone?). They are as real as ever. The leading manufacturers of ammo back up the statements.

A spokesperson from Remington said, "We're working overtime to produce ammo, but right now we cannot meet the demand. Our only option would be to add more equipment, but that's not an immediate solution because it would probably be a year out before we could add significantly to the amount we're producing now."

It's not just ammo though. Gun sales have been surging too. Gun manufacturer Sturm, Ruger, & Company (NYSE:RGR) said its sales climbed 81% in the last quarter of 2008. There's no sign of a slowdown anytime soon either.

There are quite a few catalysts for the shortages as well.

On the demand side of things, most of it seems to stem from expected government regulation. Many gun owners expect new bans, a new level of background checks, limitations on how much ammo can be purchased or stored, and/or a five cent per round tax on ammo.

Remington's media liaisons added, "Our operations are running 24 hours a day, seven days a week. Our team is literally working around the clock."

The whole shortage has paid off handsomely for gun and ammo manufacturers. Shares of Sturm, Ruger & Company and Smith & Wesson (NASDAQ:SWHC) have bounced back 175% and 300%, respectively, since hitting lows for the year in November.

Whether you agree with the proposed gun-control policies or whether they will be implemented doesn't really matter here (most readers will probably know where a U.S. veteran stands). Perception is what matters here. Perception is reality. And the prevailing perception of the future has gun owners buying more guns and stocking up on ammo.

If we pay close attention, the herd of gun owners can teach us a lot. They're also showing us where the real gains in guns and ammo stocks will be had.

Guns and Greed: Striking Similarities

As you can tell from what's going on in the gun world, this is a classic panic situation.

Producers simply can't ramp up production overnight. Increased demand - regardless of the cause - has sparked a "run" on gun shops and ammo dealers across the country.

Dawn Demetris-Stucker, a co-owner of ammo outlet On Target, says, "Typically, when people feel they're short on ammo, they would buy one box. When they feel there's a shortage, like we've seen recently, they want to buy five boxes."

This is the perfect example of the "buy now or you'll never be able to get it" mentality. Gun owners willingly pay an inflated price for bullets now because they fear they won't be able to buy more ammo again in the future. And if they do see an opportunity, they see increased taxes and limits on the amount they can purchase.

Does this type of situation remind you of anything we've looked at lately?