Even Without a Dividend, Sturm, Ruger is Special

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous, so looking for stocks based on what you already know and own might be a path to pursue.

Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings between one and five, helps you focus your attention by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list and then scans stocks picked by highly rated players with lists similar to yours, as well as industries in which you currently have active picks and targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
Based, no doubt, on my having rated Smith & Wesson Holdings (Nasdaq: SWHC  ) to outperform the broad indexes, the CAPS supercomputer thought I also might be interested in the only other publicly traded gun-maker, Sturm, Ruger (NYSE: RGR  ) . It was one of five Stocks of the Day it offered up for my consideration this week.

Investors can point to any number of factors to show why gun sales are shooting out the lights: a worsening economy, rising crime rates, and, yes, President Obama's re-election. Just remember: As smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Sturm, Ruger snapshot

Industry

Leisure equipment and products

Sector

Consumer discretionary

Market Cap

$1 billion

Revenue (TTM)

$443 million

1-Year Stock Return

71.8%

Return on Investment

36.1%

Estimated 5-Year EPS Growth

N/A

Dividend/Yield

$1.30/2.44%

Recent Price

$53.07

CAPS Rating

***

Source: FinViz.com. TTM = trailing-12-month. N/A = not applicable.

In my sights
There's really no reason I shouldn't have rated Ruger to outperform on CAPS at the same time I rated Smith & Wesson (or even before then). Both gunslingers are serving a growing market, and for much of that time Ruger has been better-positioned financially than its rival.

The statistics are also in their favor: The FBI has seen an 18% increase in background checks, with those for handguns up nearly 25%. While the law enforcement agency says there's no definite correlation between background checks and gun sales, one can still make the assumption that if more people are looking to buy guns, there will be more sales.

Hunting for value
Sporting-goods retailer Cabela's (NYSE: CAB  ) reports that its hunting-equipment segment, which includes guns, ammunition, and supplies, accounted for more than 50% of its sales this quarter -- up from less than 48% last year, even though it led to lower profits since firearms carry lower margins. Dick's Sporting Goods (NYSE: DKS  ) reported an increase in same-store sales, due in part to greater hunting sales.

Just the other day, S&W offered up preliminary numbers that showed the trends continuing. Revenues for the second quarter are expected to jump 48% over last year, hitting $136 million, while profit of $0.23 to $0.24 per share would be ahead of Wall Street's forecast of $0.19 to $0.21 per share. Last quarter it had a backlog of $392 million, up 61%, and while an FBI background-check backlog doesn't translate neatly into one-to-one gun sales, you can largely expect them to go up.

Things have been going well for Ruger, too, which just announced it will pay a special dividend to investors of $4.50 per share. It's so flush with cash at the moment that not only can it fund its growth and still grow its cash balances, but it can return value to shareholders with a special dividend.

Saturday night special
What makes Ruger stand out is that it is so profitable. As my colleague Alex Planes puts it, its net margins easily outpace those put up by industry peers S&W, Taser (Nasdaq: TASR  ) , and Olin (NYSE: OLN  ) , the maker of Winchester rifles.

So it was more an oversight on my part that I didn't rate Ruger to beat the market before, but now, even after its stock has enjoyed superb gains, I believe there's more room for margin expansion and increases in stock value, so I'll correct my mistake and rate the gunslinger to outperform the markets on CAPS. Tell me in the comments box below whether you agree that Sturm, Ruger can keep going guns a-blazin'.

No buzzkill here
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  • Report this Comment On November 28, 2012, at 6:46 PM, f00lmot wrote:

    I bought RGR when it was first on the HG watch list. I am getting more than 50% of my investment back in a special dividen. Yahoo!

    Hope it contuines its strength.

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