Guns Still Better Than Gold!

| About: Sturm, Ruger (RGR)

Guns Still Better Than Gold!

I wrote an article back on August 21 of last year about the fact that gun stocks had been outperforming gold stocks by a wide margin.

I focused in on Sturm Ruger (NYSE:RGR), a small-cap company with its headquarters in Southport CT. The stock was trading at $29.50 at the time. I also owned a large position for my clients who are aggressive growth investors.

The stocked stormed higher in the ensuing months, and finally topped out at $58.42 per share on May 2, 2012. I eventually sold the stock on May 11 at $50.21 for a very healthy profit. The stock finally broke down below its trend line, and it was time to move on.

The stock went into a down trend that finally ended in early June at a price of $34.22. The stock has been back in an uptrend ever since. The fact of the matter is that the stock has gotten way ahead of itself and was overdue for a healthy correction.

Now that its correction is over, and the stock is back in an uptrend, it is definitely time to analyze it again.

I like to begin by looking at the performance of the stock:

Data from Best Stocks Now App

As you can see, the stock has delivered superior, albeit a bit volatile, returns to investors over the years. Its 10-year track record is superb, as its five year, three year, and one year returns. The stock has been delivering alpha for a long time.

Also notice the stock was up 10.4% while the market was down 38.5% in 2008. It should be noted that the stock has just gone through a correction of 40% however. Sturm Ruger is not a low beta stock, but the returns have been well worth the volatility that is inherent in the stock.

When I compare the stock to just over 2,800 that I follow, it earns a relative performance grade of "A." This puts it in the top 7% of all stocks from a short-term, intermediate-term, and long-term basis.

During my 18 years as a professional money manager, I have learned that it is not wise to buy a stock just because of its performance. VALUE is also a critical area to analyze.

I spent some years as a stock analyst. One of my main jobs was to come up with a valuation for the companies that I visited. I would establish earnings estimates and project a five year growth rate for those earnings. From those numbers, I would then establish a valuation for the company.

I would then compare the current price of the stock with the valuation that I came up with. I liked to establish five-year price targets as opposed to short-term ones. Let's take a look at a current valuation for Ruger:

Data from Best Stocks Now App

The consensus EPS estimate for next year currently is $2.91 per share. There is not a consensus growth rate on the street. I have to calculate my own growth rate.

The company has been growing its earnings at a rate of 69% per share over the last five years. It has delivered earnings growth of 33%, 81%, 80%, and 88% respectively over the last four quarters.

I am using a very conservative five-year growth rate of 12% per year over the next five years. This would get the company to about $4.58 in earnings per share, five years from now.

I am applying a reasonable multiple of 17X to those future earnings to calculate a five-year target price of $78.00. I also believe that this target price has lot of upside potential, as my assumptions are very conservative.

Don't forget that you also get a current dividend yield of 2.6% with the stock. It should also be noted that the two other publicly traded gun stocks, Cabelas (NYSE:CAB) and Smith & Wesson (SWHC) are hitting new highs right now.

When I compare the performance and valuation of Ruger against 2,840 other possible investments, it comes in at #172. It also gets an overall grade of "A-".

There is a lot to like here! Sturm Ruger is definitely worth a look once again. I am long Ruger in the Aggressive accounts that I manage. It is also one of the 23 stocks in the Aggressive Model Portfolio that I publish every week.

Data from Best Stocks Now App

Disclosure: I am long RGR.