I’m a failure.
I’ve failed at the same thing 3 years in a row.
I haven’t been able to go through all 100 stocks from the Forbes Small Company list even one time.
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Sure it’s a big task and thank goodness I am able to automate and eliminate mundane tasks by using the OSV Stock Analyzer. I’m saving countless hours in my research and writing as I continue with the list.
But my problem recently has been a lack of focus.
How often do you start looking at a stock, start reading, and as you get deeper and deeper into the stock, your research tends to go more sideways and sideways.
The other day, when I was looking at Intuitive Surgical, Inc. (ISRG) I started off with the industry, then the issues with the FDA came up so I started reading those notes. After 30 minutes or so, I decided to look up how the robots work so I ended up spending another 30-40min watching on youtube and being amazed at the robots in action.
I posted a video of the robot lacing up a football and on any other given day, that would have aroused my curiosity to find out why there’s a shoelace in a football in the first place, and how a ball is made.
I just love to know how things work.
Eventually I would have ended up checking out the latest scores before being jerked back to the task at hand.
So here’s the deal.
I’m determined to look at all 100 stocks this time.
I won’t like all of them and I won’t be writing about all 100 either.
The reason why I’m so infatuated with the Forbes list is that over the years, it has proven itself.
You also benefit because you are being introduced to small but solid and fast growing companies with bright futures, bucking trends and defining new business models.
If you see that I’m not posting regularly about the companies in the list, let me know.
OK. That’s enough peptalk for now. Back to the topic.
How Companies Make it to the Forbes List
No rocket science here. The criteria is simple.
- annual revenue between $5 million and $1 billion
- stock price no lower than $5 a share
- excluded financial institutions, REITs, utilities and limited partnerships
- rankings are based on earnings growth, sales growth and return on equity in the past 12 months and over five years
- dropped thinly traded names and those with fuzzy accounting or major legal troubles
- factored in stock performance versus each company’s peer group during the last year as of Oct. 1
- financial data is pulled from Reuters
- fundamentals via FactSet
Sturm, Ruger & Company (RGR)
Today’s focus is on Sturm Ruger & Company (NYSE:RGR), maker of guns.
The gun business is on a heck of a run. Ever since lawmakers called for additional regulations and some states banning certain firearms, people have been loading up on guns before they are banned from purchasing them.
Read the article comparing ROE, ROIC and CROIC to catch up on the definition and the difference.
If CROIC is above 13%, it is consider really good, but for Sturm, Ruger & Company (NYSE:RGR) to be at 80% at the moment is unheard of.
What makes these returns even more impressive is that the company has no debt.
Dan Myers wrote a mega post on the types of returns achieved by companies with no debt vs with debt. The results will surprise you so read it if you haven’t.
And that’s partly why I’m looking at these numbers and it is that much more impressive.
Regarding FCF and earnings, except for a few very minor drops, if you drew a line, it a straight one marching towards the upper right corner.
This is the same throughout the financial statements.
Take a look at the margins.
What’s driving all these high margins and returns are strong business performances.
One of my favorite ways to look at the efficiency of a company is to analyze the cash conversion cycle.
It’s more than just looking at days in inventory. It gives you insight into the operations and health of the company.
- Sturm, Ruger & Company (NYSE:RGR) is collecting money at a faster rate than its 10 year average of 39.6 days
- Inventory days is at the lowest its ever been. 10 year average is 66.1 days and 5 year average is 21.5 days
- Days payable has gone up which means that it can utilize its cash for some extra days
All in all, this has led to a cash conversion cycle of 7.7 days.
To give you a sense of how awesome this is, Wal-Mart, which strangles vendors by paying as late as possible, has a cash conversion cycle of 10.
That should put into perspective how well the guns have been selling and the business is operating.
So What’s It Worth?
The part I hate the most when coming up with an intrinsic value range is that I’m human and I don’t know what turn of events can occur.
I fully admit that I am no expert on guns. Growing up, I’ve only used my BB gun to shoot at pigeons wearing my homemade commando gear before I got in trouble by the neighbor.
But the only main risk that I can see is:
- Political risk. If by a miracle, guns are banned in the US, then guess what happens to Sturm, Ruger & Company (NYSE:RGR)
This is a risk that you obviously have no control over.
The one other risk that you do have control over is determining what price you are willing to pay for the growth the company has been experiencing.
At the moment, it’s priced for about 12-13% growth.
With its solid fundamentals, although the stock price is hitting highs every week it seems, $70+ range is a fair price for a great company.
It’s a Charlie Munger type of company.
The upper range of the intrinsic value?
Assuming that it’s business as usual, I can see it hitting $100.
But what if it isn’t business as usual? What if Sturm, Ruger & Company (NYSE:RGR) hits the wall?
Based on using the Earnings Power Value method, a no growth value is $35. If growth is wiped out, then with the current numbers, a 50% shave is possible.
Here’s the range again.
- Upper: $100
- Fair: $70
- Lower: $35
There’s a possible 42% upside with a 50% downside. Fairly symmetrical risk-reward.
As much as I like the company, I will have to put it on my shopping list and wait for a sale.
I want to buy something where the upside is 50% and downside is 10%.
Something along those odds.
To see the numbers for yourself, click the button below to download the stock report, saved using the OSV Stock Analyzer.
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