Set Your Sights On Sturm, Ruger & Co.

Ever since 1791, when the " ... right of the people to keep and bear Arms," was established in the Second Amendment to the U.S. Constitution, many Americans have exercised their right to own firearms, and many still regard it as a basic individual liberty. By extension, the weapons manufacturing industry has proven almost as unshakable as the Constitution itself.

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Founded in 1948 and headquartered in Southport, Connecticut, Sturm, Ruger & Co. (NYSE: RGR) is a core competitor in a well-established industry. The company produces and markets rifles, shotguns, pistols and revolvers under the Ruger brand name.

Fundamentals on Target
The durability of its industry has consistently translated into solid financials for Ruger. At the time of writing, the company sports a 34% trailing ROE. Sturm Ruger has generated about $1.50 in free cash flow per share over the past 12 months, which represents an 11% free cash flow yield. On both an ROE and free cash flow basis, Ruger has outperformed key publicly-traded competitors such as Smith & Wesson (Nasdaq: SWHC). Additionally, while a firearms manufacturer such as Ruger always has its share of detractors, its products are relatively straightforward and are not subject to the same level of uncertainty regarding their future as products like those from Taser (Nasdaq: TASR).

These recent rosy results have come on the heels of consistent longer-term success. The company has managed to grow its free cash flow per share at a 56% CAGR over the past five years. On that metric, Sturm Ruger is on par with the likes of Wal-Mart (NYSE: WMT) and Amazon.com (Nasdaq: AMZN)- certainly good company to be in.

When you also consider that the company has no long-term debt and is currently sitting on almost $3 per share in cash, the stock certainly looks cheap. Currently trading in the $13 range for a trailing P/E of less than 10, bargain-hunting value investors definitely should be considering pulling the trigger on Ruger.

Yes, We Can (For Now)
While the company has historically enjoyed stable product demand, in recent years it has benefited, along with the rest of the firearms industry, from an Obama-inspired boost in gun sales. While initial fears of a Democrat-controlled government tightening gun laws and restricting firearm sales have yet to materialize, this has not stopped many Americans from preemptively buying more guns just in case such a scenario unfolds. (For more, see The Evolution Of Sinful Investing.)

As recently as Q1 2010, Ruger reports that the Obama boom has lasted longer than expected, and has substantially bolstered the company's top-line sales. This is but icing on the cake for an already attractive investment.

Insiders Reloading, Shorts Taking Cover
Although the stock has already risen considerably over the past year, Ruger insiders remain willing to load up on their own company's shares. Ruger director John Cosentino has been trigger-happy as of late, recently paying as much as $12/share to buy $334,000 worth of shares, increasing his common stock holdings by 58%.

At the same time, RGR shorts have been covering. Month-over-month, the number of RGR shares held short is down 10%. With the stock's short ratio currently sitting at 15, there remains plenty of upside to be had in this stock should more shorts feel the need to run for cover.

Shooting Fish in a Barrel
Strum Ruger's business has demonstrated remarkable resilience in a very challenging economy. Benefiting from the political climate, it continues to shoot the lights out with its fundamentals, but the stock is priced like investors expect it to jam up any minute. To paraphrase Warren Buffett, buying a quality company like this on the cheap just may be the investment equivalent of shooting fish in a barrel ... after all the water has run out.

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