Thursday, August 11, 2011

Pistol-Whipping Gold

What's been a better trade than gold over the last five years? Guns. But not just any guns: guns made bySturm Ruger & Co. (RGR - commentary - Trade Now).

The stock has been on a tear, up about 80% in the last year, while the S&P 500 is up only 4%. Even the mighty SPDR Gold ETF (GLD -commentary - Trade Now) is up about 40% in comparison.

If you thought the global debt-fear trade was a boon for gold, the yellow metal's got nothing on firearms. Sturm Ruger more than quadrupled over the past five years, while GLD is up "only" 157%, and the S&P is down 9% in that period.

In some ways, you could think of RGR as a levered proxy for playing the rise of gold. Sturm Ruger got killed in the 2008 collapse of the financial system. When GLD was liquidated for cash, so was Sturm Ruger. Its stock dropped from $20 in the fall of 2007 to a low of $5.18 in November 2008.

At a time of hyper-concern for economic collapse, some thought gun sales would propel the stock higher, but it got milked for cash just like any other stock. Since then, the stock has risen quickly and steadily to its current price above $26.

On Monday, while the U.S. debt downgrade roiled the markets and sent indices down more than 2%, Sturm Ruger's stock was up.

Not just any gun-seller can rake it in, though. Over the last five years, gun maker Smith & Wesson (SWHC- commentary - Trade Now) is down 66%. It's been dead money since the market bottomed in March 2009.

Sturm Ruger has been introducing new products and beating analyst estimates. Thirty-four percent of the recent quarter's revenues came from new products. Channel sales were up 24% year-over-year. Cash is growing to $77 million with no debt. The Southport, Conn., company's forward price-to-earnings ratio is about the market average of 14x.

The problems that have dogged Smith & Wesson have to do with lack of profitability. Earnings growth has been slowing, and it has $80 million in debt vs. $50 million in cash.

If you have to hunker down in coming months, Sturm Ruger is ready to arm your portfolio.

From RealMoney

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