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Short sellers eye gun makers on regulation revival

Time for more gun control?

Investors are increasingly betting against the shares of firearm producers with the rising prospect of gun control in the U.S., according to new data from financial data firm Markit, although the tragic Orlando shooting is expected to actually prompt traders to close their positions.

Short interest in North American gun maker Smith & Wesson has spiked 370 percent ahead since the first week of January, with 11.6 percent of the company's shares now out on loan, according to Markit data.

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"Short sellers have returned to U.S. gun makers after backing off last year, as surging sales driven by threats of tighter gun control saw Smith and Wesson shares rise 132 percent in 2015," the report released Friday said.

Short selling is an investment tactic by which a speculator borrows a financial instrument, such as a stock, and sells it in the hope of buying it back later at a lower price, thereby making a profit. Markit use the amount of shares out on loan as a proxy for short selling.

Smith & Wesson's stock was downgraded by two banks — BB&T and Cowen & Co — bank in April, which cited weakening demand after the Paris terror attacks and San Bernardino shooting initially prompted a jump in sales. Sector peer Sturm Ruger & Co has also seen short interest rise 26 percent since the start of the year, with 6.9 percent of its shares on loan as of Friday.

Orlando shooting timeline: What we know now

The latest figures don't yet account for reaction to the at a gay nightclub early Sunday. U.S. President Obama called the tragedy "an act of terror and hate."

Markit Analyst, Relte Stephen Schutte, told CNBC via email that while it's extremely hard to speculate about how short sellers will react to the massacre, it could prompt investors to close their short positions.

"Previous incidents involving gun violence have prompted proposed regulatory changes to gun control which have been cited for increased sales in the past, seeing short sellers cover," Schutte told CNBC. Smith & Wesson shares were up 9 percent in premarket trade on Monday morning.

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