Firearms in a Fearful Market: RGR

It’s difficult to stay positive in a market like this.  On Monday, the indexes suffered their worst one-day drops since October.  Although the November lows are in place, fear is now the dominant emotion on The Street.  The feeling of uncertainty is spreading to everyday Americans as well.  Yes, the holiday season is upon us, but a continuous stream of bankruptcies, bailouts, and layoffs doesn’t exactly put everyone into the Christmas spirit.  Fear has taken hold on Main Street.

Fear + Uncertainty + Doubt = Opportunity

While fear settles into the heartland, we’re thinking about how to play such sentiment.  Yes, shorting stocks is one way to capitalize on this market, but there are marked reasons why some investors aren’t comfortable with that strategy.  Also, there are bear market funds and they’ve done quite well this year.  But bear markets don’t last forever. What else might do well in such a market environment?

While we were looking around, we came across a news story in a compelling sub-sector: firearms.  Texas is looking at an Open Carry Law for Handguns.  The 2^nd most populous state in the nation will be considering a bill for duly registered gun owners to display their wares for all to see.

Another consideration is the upcoming Democratic White House and Congress.  If history is any indicator, we may soon see increased pressure to regulate gun ownership on the national level.  Although this may seem bearish for firearms manufacturers, these efforts usually excite latent 2^nd Amendment tendencies in the populace.  Hence, gun manufacturers can garner sales in the months leading up to impending restrictions.

A Solid Firearms Pick

One of the ways you can capitalize on these developments is by buying a stock of a gun manufacturing company.  Looking over the horizon, we see one that looks promising. Sturm, Ruger & Company, Inc. (RGR), better known as Ruger, has been making guns since the end of World War II.  They manufacture rifles, shotguns, pistols, and revolvers.  This diversification across several consumer firearm segments makes Ruger unique among the major gun makers.

Our analysis reveals a couple more reasons to like it.  Last week, Ruger authorized a $5 million stock repurchase program.  This action underscores RGR’s belief in the future success of their business.  Five million dollars may not seem like much, but it’s over 3% of their net revenue in an environment where every company is looking to conserve cash.  Second, RGR is trading at a two year low.  On a split and dividend-adjusted basis, RGR is trading near a 16-year low.   We’re not promising this $6.37 stock will make a substantial move anytime soon, but we like the prospects right now.  Year over year quarterly revenues are currently at +31%!

Like all stocks under $10, RGR is more volatile than larger companies.  Make sure your stops are in place and carefully consider whether this small cap fits your overall investing strategy.  If it does, RGR could be a big winner in the next few months.  If you’re looking for a value pick, Ruger may be a perfect choice.      

All the best.