Is Sturm, Ruger the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Sturm, Ruger (NYS: RGR) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sturm, Ruger.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%11.8%Fail
 1-Year Revenue Growth > 12%3.7%Fail
MarginsGross Margin > 35%32.7%Fail
 Net Margin > 15%11.0%Fail
Balance SheetDebt to Equity < 50%0.0%Pass
 Current Ratio > 1.33.21Pass
OpportunitiesReturn on Equity > 15%25.6%Pass
ValuationNormalized P/E < 2017.98Pass
DividendsCurrent Yield > 2%1.6%Fail
 5-Year Dividend Growth > 10%26.3%Pass
    
 Total Score 5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With 5 points, Sturm, Ruger hits the center of the target. The gun maker has rebounded sharply since the market meltdown in 2008 and 2009, and the company is benefiting from some positive trends.

Like many industries, gun manufacturers got hit hard by the economic recession. But after the 2008 elections, concerns about possible gun-control laws from a Democratic administration boosted sales of both Sturm and Smith & Wesson (NAS: SWHC) . In fact, the trend was big enough to move the needle at sporting-goods retailers like Cabela's (NYS: CAB) as well.

Most of those fears have turned out to be unfounded. This year, discount retailerWal-Mart (NYS: WMT) is bringing back firearms to some of its stores, and Sturm, Ruger should reap additional rewards on top of the higher order volumes it had already reported.

One advantage Sturm, Ruger has over Smith & Wesson is Sturm's top-selling LCP .380 compact handgun, which arguably is a better fit for customers seeking to take advantage of new concealed-carry gun laws in several states. Sturm's earnings report earlier this week bore that out, with the company posting brisk demand for handguns in seeing a 32% jump in net income. With TASER (NAS: TASR) also staging improvements in business, it's clear that self-defense is back in style.

Sturm, Ruger hasn't grown as much as investors would like to see. But with a reasonable valuation, a decent and growing dividend, and good prospects for the future, Sturm, Ruger could get a lot closer to the 10 ring at some point.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Add Sturm, Ruger toMy Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our13 Steps to Investing Foolishly.

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.The Motley Fool owns shares of Wal-Mart.Motley Fool newsletter serviceshave recommended buying shares of and creating a diagonal call position on Wal-Mart. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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