Sturm, Ruger & Company's Rally Will Soon Reverse Course

Gun stocks have been on a terrific run over the last year and a half with the likes of Sturm, Ruger & Company (RGR) jumping over 100% in the reference time period. The fear of gun control laws have propelled the sales of guns in the U.S., which in turn has led to the rise on Sturm, Ruger & Company.

While the rise has been terrific, I don’t think it will last any longer and shares Sturm, Ruger & Company will likely reverse its trend in the near future. Sturm, Ruger & Company has historically struggled in the post-boom periods and I believe this time will be no different.
Thus, I think investors should initiate a short position in the stock.

Gun demand is limited

Although gun sales are growing substantially, the demand is unsustainable primarily because guns last a long time. Guns can last for decades and require very little maintenance. Unlike other products like smartphones, guns do not need to be replaced every few years. Since guns last for years, if not decades, the current demand is unsustainable in the long-run. Even Smith & Wesson Holding’s (SWHC) CEO James Debney, told analysts on a conference call that the demand for firearms is a result of short-term influences of “potential impact of news events and the current political environment.”

And as mentioned above, Sturm, Ruger & Company struggles in the post-sales boom period, which is why I think the stock is a good short candidate as of now.


Sturm, Ruger & Company factors into account that the company will continue witnessing strong demand for at least a year. The stock is trading at a trailing P/E ratio of over 23, whereas the P/S ratio stands at 2.61. In addition, the forward P/E ratio currently sits at 18, which implies that analysts’ aren’t expecting Sturm, Ruger & Company’s earnings to grow massively in the next 12 months.

Given the valuation, investors will be expecting double-digit sales growth and strong earnings growth from Sturm, Ruger & Company over the next 12 months. However, as mentioned above, the strong demand for guns is not sustainable and will likely fall in the coming months. Since the company has already witnessed strong sales growth over the last 12 months, it will be very difficult for Sturm, Ruger & Company to top those numbers this year.

The fear of gun control laws can only spur the demand so far and Sturm, Ruger & Company will need another catalyst to justify its current valuation. For this reason, I think the stock is a short at of now.
Published on Mar 21, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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