Summary
- At this price, the stock holds significant value because of the current macro factors.
- The biggest advantage here is that the stock is trading well below that crucial 25x TTM earnings level that I identified as the tipping point for a price correction.
- With background checks still setting 20-year highs, there's ample room for growth once the inventory issue is normalized.
When I last covered Sturm, Ruger & Co. (NYSE:RGR) in my August 28 article titled Sturm, Ruger: The Perfect Storm Will Eventually Pass, I was neutral on the stock because of its then-current valuation level and other factors. At the time, the stock was trading at over $70, and my recommendation was to "get in at well under $70." That time has now come as the stock is a tad above $60, presenting a lucrative opportunity to invest in the firearms industry.
The biggest advantage here is that the stock is trading well below that crucial 25x TTM earnings level that I identified as the tipping point for a price correction. In the last article, here's what I pointed out:
Historically, almost every time the stock goes near or above the 25x TTM earnings multiple, the market inevitably corrects the stock price to bring the multiple back to under 20x, sometimes significantly so. The current TTM P/E ratio is already at 28x, having been corrected down from the mid-30s. The price could go higher still as demand continues to remain strong, but when demand levels fall back to normal, we could see that effect kick in again, potentially bringing the stock down to an 18x multiple, which would be in the vicinity of around $70.
What I did not expect, to be honest, was for that to happen so rapidly, and despite Q3-20 revenues coming in hot at nearly 55% over the prior period. The stock dropped from the then-current price of $72 down near the $60 level. There was a brief rally leading up to the 2020 Presidential Election and the Q3 earnings announcement the week before, but it failed to hold, dropping back to near $60.
Source: Seeking Alpha
It's actually surprising that the stock is now trading at around 13x forward earnings despite the fact that background checks, one of the key indicators of firearms sales in the United States, showed no signs of flagging in November.
