A look back at our Sturm Ruger Co (RGR) analyses

Soon after launching Duke of Dollars, we introduced our investment philosophies and then published an in-depth analysis of Sturm, Ruger & Co. Part 1 focused on the biography of the company and the popular narrative surrounding the current stock price. Part 2 focused on the balance sheet, income statement, and expectations for the performance of the business.

We started with RGR for a few reasons:

  1. The capital structure made the analysis much simpler because RGR carries no debt
  2. The business itself is remarkably easy to understand
  3. At the time of the initial articles, the stock price was wildly depressed by specious headline risk, wherein the Trump election drove the ticker into the clearance bin on shaky logic
  4. Not many bloggers or investment professionals cover RGR, so we thought we’d do something a little different

From our 2/12/2017 article:

We believe that the three-month drop is indicative of Mr. Market’s myopia. This price decline seems to be symptomatic of shorttermitis.

A big purchase of RGR

And then we both walked the walk after talking the talk, one of us in a big way:

Purchasing $15k of RGR at its lowest intraday price point in 2017 has helped the performance of my portfolio YTD, but it was an extremely difficult decision to make at the time. My position in RGR was already far beyond the “100% full” mark, and there were other businesses I was itching to own. However, every single time I ran the numbers, the profits at Sturm Ruger & Co were by far the cheapest that I could buy, and the margin of safety at those price points was too enticing to ignore.

An investment principle

When investors are looking for a place to park new money, they sometimes make the mistake of looking for a new investment opportunity. It’s always a good idea to run the numbers and consider: are the companies you currently own are worthy of another round of investment?

A new narrative for Sturm Ruger & Co

We discussed ad nauseam that RGR price was stomped because traders feared that a Republican federal government would assuage all the fears of gun buyers, and gun sales would collapse. We even accounted for a 20-30% drop in 2017 sales when calculating the fair value range. We’re not at all surprised that this narrative has collapsed faster than the price of RGR did from November to February. Take a look at the NICS background check  numbers for February and March of 2017 compared to the same months in 2016.

So far in 2017, the month-over-month comps have worked out to -19.7%, -14.5%, and -3.6% in January, February, and March respectively. These data are lightyears ahead of expectations of a 20-30% extended decline, and the recent spike in the stock price > $60 is directly related to the better-than-expected indicators. RGR earnings in 1Q2017 will be down, but not by much. If they actually manage to grow earnings YOY in 2017, then the stock is still severely undervalued.

Another investing principle

Pay attention to the narrative in the media. Is the underlying business really going to suffer as much as CNN headlines suggest? This goes for Target with its bathroom dustup, Under Armour with its Steph Curry political disagreements, and Sturm Ruger Co with its wholly misunderstood customer base.

In an age where events are immediately followed by knee-jerk tweets, and those tweets are instantly analyzed by trading algorithms, opportunity awaits for the investor who can cut through the bullshit. Look at this comical mixup of O’Reilly Automotive and Bill O’Reilly. That’s just funny. And there’s a lesson to be learned from the story!

Sturm Ruger Co vs media explanations

Specific to RGR is one big misconception:

Fact: Gun sales have boomed since 2006.

Popular Explanation: Gun buyers are just irrationally scared: of legislation and boogie men.

Nope. As we explained in Part 1, gun buyers are hobbyists: “They’re repeat consumers, not like people who buy deodorant so they don’t stink, but more like wealthy individuals with a wristwatch or fine jewelry obsession.” Postulating about a gun hoarder running out of space to add to his collection is very similar to stating that video game sales will decline because gamers have already bought enough copies of Skyrim. It’s absurd.

The narrative around RGR will start to shift as investors realize a freshly-minted 2017 fact: “Gun sales continue to be robust under a wholly-controlled Republican Government.” The scaredy-cat gun-toter argument is about to bust, at least as far as investments go.

Where do we go from here with RGR stock?

So my March 6th purchase is up > 25% in less than 55 days. There’s an old torn up trader inside of me whispering, “Take your profits.” But I’m investor now, and I’m letting this horse run its race. If my calculations of RGR’s forward or trailing P/E ratio end up to be > $18 per share of annual profit, then I will consider selling part of my position held in IRA tax shelters. This would put the share price somewhere in the $80 – $95 range. I’d only consider selling because RGR’s slice of my portfolio pie chart is too big already; a secondary surge that pushes triple digits would only exacerbate that (good-to-have) problem. And I’ll only follow through with the idea of selling if I find a more attractive place to invest the proceeds.


Disclosure: Long RGR, Long TGT, long UA. No position in ORLY, no plans to initiate one. We received no compensation from any of the companies mentioned in this article.

PS – Ruger is still innovating

We argued heavily in the initial analyses that product innovation at the company would be a long term boon for business. After I hit publish, I saw I had a new marketing email from Ruger.  That’s just cool. I didn’t even want a(nother) .22LR a few minutes ago. The internet agrees: “Take my money!”