Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Sturm, Ruger (NYSE: RGR) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sturm, Ruger.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 11.8% Fail
  1-Year Revenue Growth > 12% 3.7% Fail
Margins Gross Margin > 35% 32.7% Fail
  Net Margin > 15% 11.0% Fail
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 3.21 Pass
Opportunities Return on Equity > 15% 25.6% Pass
Valuation Normalized P/E < 20 17.98 Pass
Dividends Current Yield > 2% 1.6% Fail
  5-Year Dividend Growth > 10% 26.3% Pass
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With 5 points, Sturm, Ruger hits the center of the target. The gun maker has rebounded sharply since the market meltdown in 2008 and 2009, and the company is benefiting from some positive trends.

Like many industries, gun manufacturers got hit hard by the economic recession. But after the 2008 elections, concerns about possible gun-control laws from a Democratic administration boosted sales of both Sturm and Smith & Wesson (Nasdaq: SWHC). In fact, the trend was big enough to move the needle at sporting-goods retailers like Cabela's (NYSE: CAB) as well.

Most of those fears have turned out to be unfounded. This year, discount retailer Wal-Mart (NYSE: WMT) is bringing back firearms to some of its stores, and Sturm, Ruger should reap additional rewards on top of the higher order volumes it had already reported.

One advantage Sturm, Ruger has over Smith & Wesson is Sturm's top-selling LCP .380 compact handgun, which arguably is a better fit for customers seeking to take advantage of new concealed-carry gun laws in several states. Sturm's earnings report earlier this week bore that out, with the company posting brisk demand for handguns in seeing a 32% jump in net income. With TASER (Nasdaq: TASR) also staging improvements in business, it's clear that self-defense is back in style.

Sturm, Ruger hasn't grown as much as investors would like to see. But with a reasonable valuation, a decent and growing dividend, and good prospects for the future, Sturm, Ruger could get a lot closer to the 10 ring at some point.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Add Sturm, Ruger to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.