During my 18 years as a professional money manager, I have learned that it is not wise to buy a stock just because of its performance. Value is also a critical area to analyze.
I spent some years as a stock analyst. One of my main jobs was to come up with a valuation for the companies that I visited. I would establish earnings estimates and project a five-year growth rate for those earnings. From those numbers, I would then establish a valuation for the company.
I would then compare the current price of the stock with the valuation that I came up with. I liked to establish five-year price targets as opposed to short-term ones. Let's take a look at a current valuation for Ruger:
The consensus EPS estimate for next year currently is $2.91 per share. There is no consensus growth rate on the Street so I have to calculate my own growth rate.
The company has been growing its earnings at a rate of 69% per share over the last five years. It has delivered earnings growth of 33%, 81%, 80%, and 88%, respectively, over the last four quarters.
I am using a very conservative five-year growth rate of 12% per year over the next five years. This would get the company to about $4.58 in earnings per share five years from now.
I am applying a reasonable multiple of 17X to those future earnings to calculate a five-year target price of $78. I also believe this target price has lot of upside potential, as my assumptions are very conservative.
Don't forget that you also get a current dividend yield of 2.6% with the stock. It should also be noted that the two other publicly traded gun stocks,
Smith & Wesson
, are hitting new highs right now.
When I compare the performance and valuation of Ruger against 2,840 other possible investments, it comes in at #172. It also gets an overall grade of "A-".
There is a lot to like here! Sturm Ruger is definitely worth a look once again. I am long Ruger in the aggressive accounts that I manage. It is also one of the 23 stocks in the Aggressive Model Portfolio that I publish every week.
At the time of publication the author had a position in RGR.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.