NEW YORK ( TheStreet) -- I wrote an article back on August 21 of last year about the fact that gun stocks had been outperforming gold stocks by a wide margin.
I focused on Sturm Ruger ( RGR), a small-cap company headquartered in Southport, CT. The stock was trading at $29.50 at the time. I also owned a large position for my clients who are aggressive growth investors. The stock stormed higher in the ensuing months, and finally topped out at $58.42 per share on May 2, 2012. I eventually sold the stock on May 11 at $50.21 for a very healthy profit. The stock finally broke down below its trend line, and it was time to move on. The stock went into a down trend that finally ended in early June at a price of $34.22. The stock has been back in an uptrend ever since. The fact of the matter is that the stock had gotten way ahead of itself and was overdue for a healthy correction. Now that its correction is over, and the stock is back in an uptrend, it is definitely time to analyze it again. I like to begin by looking at the performance of the stock: As you can see, the stock has delivered superior, albeit a bit volatile, returns to investors over the years. Its 10-year track record is superb, as are its five-year, three-year and one-year returns. The stock has been delivering alpha for a long time. Also, notice the stock was up 10.4% while the market was down 38.5% in 2008. It should be noted the stock has just gone through a correction of 40%, however. Sturm Ruger is not a low-beta stock, but the returns have been well worth the volatility that is inherent in the stock. When I compare the stock to just over 2,800 that I follow, it earns a relative performance grade of "A." This puts it in the top 7% of all stocks from a short-term, intermediate-term, and long-term basis.
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, Cabelas ( CAB) and Smith & Wesson ( SWHC), 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.