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President Obama's proposed gun control bill will go to the Senate this April. For firearms companies, such as one of the nation's largest gun manufacturers, Sturm, Ruger & Co. (NYSE: RGR), it would seem the bill spells trouble. But in actuality, the proposed gun legislation has helped boost RGR stock. In fact, shares are currently trading within sight of their all-time high.
The stock's recent gain seems spurred by two factors. First, proposed gun control legislation would not restrict the purchase of assault weapons. As a result, gun manufacturers will still be able to manufacture and sell over 157 different models of assault weapons and high-capacity magazines. Both are important to the company's sales and the $32 billion firearm industry.
Second, the talk of firearms restriction has resulted in a fury of increased consumer demand for guns. Americans are rushing out in record numbers to legally purchase firearms before any gun bans are passed. According to the National Shooting Sports Foundation, the number of FBI background checks filed for gun permits increased 94% this January from a year ago.
As shown by the recent ramp-up in Sturm Ruger's stock, the heightened demand for the company's guns appears tremendous. In the past year and a half, shares have increased over 220%. And the technicals points to further growth ahead.
Rising off the June 2011 $16.45 low, the stock formed a major uptrend. In early November 2012, shares bullishly broke old resistance, which has become new support, around $39.72. Through this trading activity, a large ascending triangle was bullishly broken. Shares went on to hit an all-time high of $60.11 by late November.
Appearing unable to sustain momentum, within weeks, the stock slipped back to important support around $39.72. However, shares proved their strength, quickly bouncing back. The stock has been unstoppable since.
In early March, shares reapproached the $60.11 all-time high. The stock is currently trading about 13% below this peak, presenting a potentially profitable entry point for traders.
At present, shares appear on the verge of testing important overhead resistance, around $55.13. If the stock can successfully challenge this resistance level, it would bullishly break a second consecutive ascending triangle, formed by the junction of the uptrend line and overhead resistance.
According to the measuring principle for a triangle -- calculated by adding the height of the pattern to the breakout level -- shares could potentially reach a new all-time high of $70.54 ($55.13-$39.72 = $15.41; $15.41+$55.13 = $70.54). At current levels, this target represents potential 35% returns.
Traders may see these double-digit returns in the coming months. The stock is likely to move quickly if firearm demand intensifies in the coming weeks on the heels of Senate discussion around the new gun control bill.
The bullish technical outlook is supported by strong fundamentals. For the upcoming first quarter, to be reported April 29, analysts expect increased fire-arm demand will push revenue up 17% to $131.7 million, from $112.3 million in the comparable year-ago period. For the full 2013 year, analysts project revenue will increase 4.5% to $513.9 million, compared with $491.8 million last year.
The earnings outlook is similarly upbeat. For the upcoming first quarter, analysts expect earnings to rise 28% to $1.01 per share, from $0.79 per share in the year-earlier quarter. For the full 2013 year, analysts expect earnings will increase about 3% to $3.70 per share, compared with $3.60 per share last year.
In addition to a strong fundamental outlook, the company offers an attractive forward annual dividend of about 3%, or $1.62 per share. Historically, the company's dividend is about 40% of net income. With net income expected to increase in the coming quarters, shareholders can likely look forward to future dividend increases.
Risks to consider: Consumers are rushing out in record numbers to purchase guns before any new legislation is passed. However, consumer demand may cool once the bill hits the Senate or more restrictive legislation is put in place. Therefore, the timeline for potential maximum profit on this trade may be within the coming few weeks or just after first-quarter results are reported in late April.
Recommended Trade Setup:
-- Buy RGR on a break above resistance at $55.13-- Set stop-loss at $47.23, slightly below current support marked by the intersection of the uptrend line-- Set initial price target at $70.54 for a potential 28% gain in the next month-and-a-half
Most investors won't be committing new money to stocks given all the uncertainty... but they should absolutely do this.
While the sector is hanging on by a thread, shares of this company have already started breaking down.
Management is taking decisive action to dramatically turn this company and its shares around.