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Investors Dump Gunmaker in Wake of Newtown Massacre

Rick Newman

Maybe things really are different this time.

Usually after a mass shooting, there's a lot of chatter about the need for better protections against pathological killers, followed by a remarkable lack of action. In the aftermath of the shootings in Newtown, Conn., however, there's growing pressure on gunmakers from one group that tends to get results: investors who control a great deal of money.

[PHOTOS: The Victims of Sandy Hook Elementary]

The California State Teachers' Retirement System, a pension fund that manages $155 billion worth of investments, said recently that it was reconsidering an investment of at least $750 million it has with Cerberus, a prominent private-equity firm. The problem is the Cerberus owns Freedom Group, a gunmaker that manufactures several well-known firearms, including the Bushmaster rifle that Adam Lanza used to kill 5 educators and 20 students in Newtown, plus his mother and himself.

Cerberus, in turn, promptly said it would sell Freedom Group. "It is apparent that the [Newtown] tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level," Cerberus said in a press release. "We have determined to immediately engage in a formal process to sell our investment in Freedom Group."

[READ: How Obama May Inadvertently Boost Gun Sales]

The move doesn't mean that Freedom Group will be dismantled, or even sold at a fire sale price. On the contrary, gun sales tend to rise after mass shootings, for two reasons: The violence frightens some people, who buy weapons to defend themselves, and gun owners worry that new laws limiting sales could go into effect, so they stock up. Cerberus, in fact, is obligated to get the best price possible for Freedom Group, since it's their clients' money that's at stake.

But a sale could be tricky if pension funds begin anything like a boycott of firearms manufacturers. Teacher pension funds control about $1.5 trillion worth of money that needs to be invested, making funds such as CalSTRS heavyweights in the financial industry. Other public-employee pension funds, such as CalPERS, control even more money. If various pension funds were to band together in opposition to firms such as Freedom Group, it could depress the value of gunmakers.

The irony is that privately owned firms are typically more insulated from the types of pressure activists and Wall Street analysts can sometimes generate. Koch Industries, for example, is a huge conglomerate run by David and Charles Koch, brothers who are outspoken critics of President Obama and multimillion-dollar funders of conservative causes. If they ran a publicly owned company, they'd almost certainly be subject to protests and investor pressure from groups opposed to their political leanings. Yet as a privately owned firm, there's no sign that Koch Industries suffers from its owners' personal views or activities.

[READ: How Americans Overpay for Gun Rights and Other Liberties]

In the gun industry, publicly owned firms are coming under pressure just as Freedom Group is. Shares of Smith & Wesson have fallen by more than 20 percent since the Newtown shootings. Shares of Sturm, Ruger are down by about 12 percent. The selling of those shares was tepid at first, as if traders felt the anti-gun fervor that followed the massacre might quickly blow over, as it has after other shootings. A sustained drop in those shares may now indicate growing concern about the likelihood of new gun laws that restrict sales.

Cerberus has shown interest before in cashing out of Freedom Group, which it assembled over several years by acquiring a variety of gunmakers, including Remington. One option is a public offering, although the timing seems terrible for a company whose products are linked to such a horrifying event. Cerberus could also sell to another private owner, if it could find one that's not answerable to activist-minded pension funds and willing to stand up to controversy. But for now, the free market may not provide many good options.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success. Follow him on Twitter: @rickjnewman.

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