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This Controversial Stock Is Up 11% Since Election Day... And It Could Go 60% Higher

 November 19, 2012 10:31 AM
 


It's no secret Wall Street was, for the most part, rooting for Mitt Romney to win the presidential election. After all, Republican candidates are generally viewed as more business friendly, and Romney was no exception. But even if you believe President Barack Obama's second term will be bad for business and the economy overall, I'm certain his presidency will benefit at least a few types of stocks.

One stock, in particular, has jumped 11% since Election Day, climbing from $44.16 at the start of trading on Nov. 6 to about $49 now. In fact, shares performed spectacularly during Obama's first term, delivering a whopping 650% since the president's inauguration on Jan. 20, 2009.

The stock I'm referring to: Firearms manufacturer Sturm, Ruger & Co. (NYSE: RGR). If you're not that familiar with the company, it makes a wide variety of firearms including pistols, shotguns, rifles and revolvers, which it sells mainly under the "Ruger" name.

[Related -Alliant Techsystems Inc. (ATK): Forget Gun Stocks, Ammunition Maker Is Up 52%]

A major catalyst in the stock's past performance -- and one that'll be equally important going forward -- is concern among firearms owners about the president pursuing stricter gun control laws. Because they feared all types of firearms might become harder to obtain under the Obama Administration, gun enthusiasts went on a four-year buying spree. And once it became clear the president would win reelection, investors immediately began piling into gun stocks on the belief the spree would continue.

[Related -Futures Flat After GDP Data; Groupon (GRPN) Plunges]

Indeed, there are already plenty of stories about spiking gun sales since Election Day. More important, longer-term projections by industry analysts suggest fast revenue growth will be the norm for years to come. So if you'd like to play the trend, Sturm, Ruger & Co. is a wise choice for several reasons.

First, the company is clearly a leading gun maker. For the past three years, revenue has been expanding 22% a year, compared with the industry average growth rate of just 2%. As a result, Sturm is on pace to reach $480 million in sales this year, a 77% gain from 2009. Earnings growth has been astounding as well, and the company is on pace to achieve $3.50 per share in 2012 -- a 146% gain from $1.42 a share in 2009. This represents an annualized growth rate of 35%, nearly twice the industry average of 18% during the past three years.

To help maintain fast growth, the company has been introducing a steady stream of new products, including the recently released Ruger Single-Nine revolver, which resembles what an Old West gunfighter might have carried in the 1800s. Notably, on June 28, management announced the purchase of a minority interest in crossbow manufacturer Kodabow, a two-year-old startup that currently generates annual revenue of about $1 million. The acquisition nicely complements other Sturm, Ruger & Co. products that appeal to hunters, who often use crossbows during portions of the hunting season when firearms aren't permitted.

What's more, Sturm, Ruger & Co. has no debt on its balance sheet and about $80 million in cash -- by far its largest cash position in a decade. Thus, the firm has plenty of resources for continued new product development, further acquisitions and dividend increases. In terms of dividends, the company currently pays $1.53 a share, good for about a 3% yield.

Risks to Consider: There's always a risk of stricter gun control legislation and the potential for costly lawsuits stemming from product-related injuries. Both could adversely affect the company's bottom line.

Action to Take --> Because of the "Obama effect," Sturm, Ruger & Co.'s dominant position in the firearms industry and the firm's excellent financial health, I agree with analyst projections for sales to climb 13-14% a year to around $710 million in 2015. I also agree with estimates for annualized earnings growth of 14.5%, which would increase earnings to $5.25 per share in 2015.

Assuming the stock's price-to-earnings (P/E) ratio stays at about 15, the price could jump about 60% from current levels to nearly $79 a share (15 x $5.25 = $78.75) by 2015. This would mean a hefty 60% gain during the next two years.

-- Tim Begany

Tim Begany does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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