Tags: Ruger & Co. Inc. (NYSE: RGR), Sturm

Sturm, Ruger & Co. Inc. (NYSE: RGR) Hitting the Bull's-Eye

By , Money Morning •

Sturm, Ruger & Co. Inc. (NYSE: RGR) designs and manufactures firearms in the United States. Ruger, as it's known in the industry, produces retail firearms.

Ruger sales represent an investment in personal security, entertainment, and an investment in the capacity to bring home meat from hunting.

That makes the company a great "tell" on the psychology of Main Street.

Ruger has just released second-quarter earnings, and it is no surprise that the stock is regularly setting 52-week highs. The company is hitting the bull's-eye with its top-line internal growth and bottom-line results.
So it's time to buy Sturm, Ruger & Co. Inc. (**) - as fear and uncertainty continue to roil the economy and stock market.

Targeted Execution

A quick look at the company reveals that Sturm, Ruger & Co. Inc.:

  • Has no debt.
  • Is regularly raising its dividend.
  • Is actively buying back shares, with more purchases to come.
  • Has a large short position to be squeezed.
  • And offers a viable takeover target.

In today's tough economy, it's not often you find a U.S. company that is growing its top and bottom lines at a historic rate.

Better still, Ruger has an unleveraged balance sheet, which means it has no outstanding debt. That gives the company the ability to leverage up if it ever sees an investment worth making.

The lack of debt also increases the likelihood of a dividend increase.

Ruger has raised its dividend twice lately - most recently when the company announced earnings on July 27, 2011. The new dividend rate is now 56.8 cents per share on an annualized basis. This brings the current yield to about 2.3%. That sure beats owning U.S. Treasuries at this point.

In addition to a solid dividend yield, Ruger is also returning value to its investors through share buybacks. Ruger bought back 133,400 of its 18.9 million outstanding shares in the first half of 2011. Those purchases absorbed $2 million; another $8 million in authorized purchases remain.

Ruger's large cash stockpile made all this possible. The company had cash and equivalents and short-term investments of $76.5 million as of July 2.

Of course, while this cash pile lets Ruger give back to its investors, it also makes the company an attractive takeover target. It's conceivable that a corporate raider would make a hostile offer and attempt to use the company's own cash to help cover the cost.

Finally, from a technical aspect, Ruger appears to have a stubborn short-seller holding 14% of the company shares short. I honestly do not understand the short thesis on RGR. Whoever the short is, they will need to pay out a higher amount on the dividend owed to the long shareholders even while this stock is setting new 52-week highs on a routine basis. This could drive the short to cover in the future.

The stock price is up 53% in the last year, while the Standard & Poor's 500 Index is up just 19% in that same time period.

Shares of Sturm, Ruger & Co. Inc.closed down 2.04% on Friday at $27.32. That's at the top end of their 52-week range of $12.66-$30.58.

Action to Take: Buy Sturm, Ruger & Co. Inc. (NYSE: RGR) (**).

In a time of great uncertainty and fear, Ruger is debt free, raising its dividend and buying back its shares in the open market.

Let's buy RGR for our long-term portfolio. The stock is volatile, so there is no reason to rush this entry. We do not want to jam this stock up, just nibbling. Let's use a series of GTC (Good Till Cancelled) limit orders to allow us to get our fill.

Use primary dollar points for our fills. So a GTC limit order at $24 with a second one at $22 for the second half of the position. This will give us an average entry of $23 per share, when the stock is currently trading around $27 or so.

(**) Special Note of Disclosure: Jack Barnes has no interest in Sturm, Ruger & Co. Inc. although he does own a few of their products. (NYSE: RGR).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed OGX Petróleo e Gás Participações SA (OTC PINK: OGXPY).

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