Friday, June 1, 2012

Investing in Guns

Firearms can be one of the few products available for purchase that do not have a huge depreciation right off the bat. As with anything there is a premium lost from not being the first to take it out of the case and use it, however lightning sometimes strikes and a gun can appreciate over time due to demand and several  circumstances as is the case with cars. This is not the type of investing we are talking about here.

The Ruger American Rifle
There are a couple big names in the industry that are publicly traded companies including Sturm Ruger (RGR) and Smith & Wesson (SWHC) where you can purchase company stock and ride the roller coaster that comes with stock values. Interestingly these are just about your only choices if you are looking to invest on a small scale, not counting Taurus which is a Brazilian company on a Brazil exchange, but feel free to do your own analysis if you are a fan.

Many of the popular manufactures like Remington, DPMS, and Bushmaster among others all fall under the Freedom Group umbrella, which is a part of the private investment firm Cerberus Capital Management. If you want to invest with Freedom Group you must have a large sum of money to invest.  This leaves a few, but very viable options to consider as a "small" investor looking to make some uncomplicated investments. 

With a resurgence in gun ownership and soaring sales in a lackluster economy, investing in Ruger or Smith and Wesson can at first glance seem like the right thing to do. However, good investors buy low and sale high, so it can be tough to gauge if these companies may already be overvalued based on those who have already bought in and pumped up the prices. Both of these stocks have some inherent elements for a good investment, but one stands out as a great buy right now.

Let's preface this discussion by saying I am no expert in investing and have "some" finance background at best. Investments take risk, which involves your money, so take everything with a grain of salt. Ruger just recently took a dive after reaching a height of $58.42 per share on May 1st, despite having beat revenue and earnings expectations and a plethora of BUY ratings coming in over the past month. On May 22nd Jim Cramer said to buy Sturm Ruger at $39.99 and now they are at $38.97.

So, why the downturn for RGR? It could simply be market sentiment. While Ruger has a low Beta (correlation to normal market conditions for all stocks in the basket), it did have a huge upturn given the great news for firearms sales. As the market has an upswing, they soared in price and as the old saying goes, "The Bigger they are the harder they fall". This can result in a massive sale off to a capture profits when the markets feel they are reaching a peak. 

Ruger (RGR) Compared to Smith &Wesson (SWHC) and Major Indices (DOW & NASDAQ)
Just this week Ruger announced they are resuming sales to distributors. Back in March they had to stop new orders due to the huge demand for their firearms, which exceeded supply and capability to keep up. This is a great problem to have, but unexpected boosts in sales can reveal some inefficiencies in manufacturing enough inventory. On the bright side they have been hoarding cash with an increase of $75 million in their coffers, which they can use for increased manufacturing capacity. They have squeaky clean balance sheet and a dividend yield averaging 3.6% over the past 5 years. As the price per share decreases (prior to you purchasing) this return just gets better. That return alone can keep you up with current inflation with some income to spare. 

On the flip side they are still at a higher price per share than any time prior to 2011. In fact their price is double that to prior years. So, a bet on Ruger is a bet that they will continue to draw in sales and innovate to gain market share compared to other options available. Their current market value of $746 million is well above their book value of approximately $200 Million, so future anticipated earnings are high. The trend for concealed carry can certainly be a boost to their sales along with the popularity of their 10/22 rifles and variety of pistol options. They also have plenty of room to innovate into other niches to extend their reach. The growing market for women purchasing firearms for self defense is certainly an opportunity they can take, which they have already done well with their pocket pistol selection. 

Many say the upturn in the firearms market comes with the upcoming elections and the uncertainty of the economy at large, which I can certainly see as a factor. However, I would prefer to think that their is an overriding growing acceptance for guns in our society and a realization of the benefits that come from the right to bear arms are mutual to all Americans. Anyway back to the money aspect...

Overall market factors can guide the price of a stock and it is hard to predict which way this may turn. One thing we do know is that the firearms industry for the most part is doing much better than other sectors. Everyone likes options and the other choice for us small time investors is Smith and Wesson.

This is part one of a two part series for the sake of brevity. Second part to follow this afternoon. 

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