Ruger May Be A Further Candidate On The Short Side – Sturm, Ruger & Company, Inc. (NYSE:RGR)

All things being equal, Sturm, Ruger & Company (RGR) has held up pretty well since shares printed their yearly high on February the 20th last. In fact, at a current $47 a share, the price only remains approximately $7 a share or 13% below their highs for the year. Many will say, this firearm seller is showing underlying strength in the face of adversity.

In times of strife, uncertainty and fear, these types of stocks can definitely gain traction especially with investors who see worse-case scenarios for the economy on the horizon. The question though is how long this “safe haven” bid will last for RGR. Today for example (Tuesday the 24th), although shares were well up early in the session, they failed to gain any real traction which resulted in shares finishing down 0.49% over yesterday.

There is a lot of bullish consensus surrounding this stock but we would recommend caution for a number of reasons which we will get into. We are conscious of Ruger’s strong balance sheet which is by far the strongest in this industry. Buying volume also remains solid over the past few sessions. I totally get it why many would invest in this name as a solid hedge against more declines in the main indices.

Here though is what we are looking at in Ruger at this present moment in time.

A we can see on the long-term chart below; shares appear to be undergoing a long-term symmetrical triangle at present. Long-term patterns are very significant in our eyes so this pattern definitely warrants attention. Now these patterns are usually neutral patterns meaning it is very difficult to guess the direction. What we do know if that we would readily dismiss an ascending triangle (bullish) due to the apparent declining trend-lines in the RSI and MACD indicators.

The issue now though for Ruger is that price is trading right at that lower trend-line. Furthermore, when we look at the acres of white-space below, real-risk is in play here if that trend-line gets breached with conviction.

Being chartists, we believe that any fundamental which could possibly affect the share-price has already been embedded on the technical chart. Therefore, it stands to reason, if Ruger shares have lower prices in front of them, we must be seeing bearish trends in some of the financials. Remember current trends form future trends. Sales and earnings are the first places to start.

2019 sales came in at $411 million. This was a 17% decline over 2018 which now means the three-year average annual top-line growth rate is negative 15%. Now guidance is very strong as it comes in at $455 million for 2020 (11% growth).

We also see this trend on the earnings side. EPS dropped 36% to $1.82 in 2019 which means that the 3-year average EPS growth number comes in at negative 26.5%. Earnings per share in 2020 though is expected to grow by 32% to hit $2.41. Granted that 2020 guidance for both the top and bottom lines are lower than in previous years, the market still is giving credit for the expected growth which is worrying.

In fact, if we look at Ruger’s valuation metrics, we can see that although the company’s book and sales multiples of 2.9 and 2.1 respectively are well below the firm´s 5-year averages, they are still light years ahead of what the industry is trading at (1.14 & 0.43). Therefore, we went 10 years out and found that Ruger’s average sales multiple over this time-period actually comes in at 1.7

Therefore, what are the takeaways? Being a follower of long-term trends, we believe that that lower trend line of the long-term triangle needs to hold in order for the bull case to remain intact. Let’s see what the rest of the trading week brings.


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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in RGR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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