Thursday, 13 July 2017

Sturm Ruger (NYSE:RGR): Is there Value in Guns?

Sturm Ruger is an American manufacturers of firearms namely pistols, shotguns and rifles. The company was founded in 1949 and is one of the largest producers of firearms in the states alongside their main listed competitor AOBC formerly Smith & Wesson.

Background Check

I have been having a look at RGR due to the apparent defensive nature of their business. Gun sales tend to rise due to economic fears, terrorist incidents, civil unrest, legislative threats of further gun control and the election of Democrats. 

97% of sales are domestic US so this means the stock is a pure play on American fear;

Gun Sales Rise after Shootings

Gun sales also rise ahead of restrictions - and peak before Christmas

This may also explain why the present moment does not offer the best entry point into RGR. The Republicans are in, there is little talk of new gun control measures and for now the economy is lumbering along. Both RGR and AOBC shares fell significantly on  June 30th after AOBC announced a weak outlook for the rest of the year. 

So I tactically I feel I need a better valuation point or catalyst to really want to own RGR now.

What I like about RGR

It has no debt. RGR runs net cash on the balance sheet meaning it is extremely under leveraged compared to most US corporates. This kind of balance sheet is highly unusual in this day and age and makes RGR significantly more robust than AOBC which is a rather more volatile share. 

Therefore somewhat unusually RGR finance their buybacks from cash:

RGR Annual Report

ROIC is extremely high. The company averages a 10 year median net rate of return of 19.7%. Similarly the 10 year average ROA is over 20%! This company has excellent returns and capital allocation and throws off a lot of cash.

The FCF yield is around 6-7% with no debt and the company pays out a dividend of around 40% of earnings yielding 3%. That dividend has been in place and growing since 2009. In terms of Earnings the PE is 14x last years earnings - which is a good discount to the wider market. 

There is also no ongoing pension liability as the company settled the scheme in 2014;

RGR Annual Report
So this is definitely the kind of stable business that I would consider highly investable for the long term. However the wider sell off in the sector and weak immediate term outlook means the stock may do nothing or trend down for some time.


A quick valuation in my model with conservative growth assumptions (3% revenue growth, stable margins) gives a DCF value around $90 a share which is a good premium to the current value of $60. However it only scores a $45 price target on the DDM model due to the low dividend payout because of buybacks as an alternative capital distribution. 

I think with a turn up in underlying sales this stock could head up towards my $90 estimate but currently there seems little in the way of an immediate catalyst to turn the sales momentum back towards stronger growth. Certainly one to keep on eye on going foward.

Disclaimer: I have no investment in NYSE:RGR at present but may do in future. These are opinions only, not investment advice. If in doubt read my disclaimer.

Sunday, 2 July 2017

Portfolio Strategy: July update

So a quick portfolio update as I have made a few changes in the past month increasing some positions.

Amiable Minotaur Portfolio


I will call this my First Quarter review as the portfolio began on the 19th of April so just less than one quarter of performance. How has performance been? Including all fees and costs I have returned -4.01% in GBP since inception and relative to FTSE AW which gained 2.82% in GBP I have under performed by 6.83% in the period! The big drag has been my Energy and Retail stocks under performing.

Not a great start - but in my experience a well chosen portfolio with fundamental characteristics can under perform for significant periods of time. One swallow does not make a spring.

I would also mention that I face various up front fees including an exorbitant 1.5% spread on FX transactions which has cost around 50bps of performance as I have bought dollars for various investments. Fortunately I can hold and settle in USD once I have some so going forward FX moves should be less of a drag at least until I buy things in Euros.

Cash drag is another issue as being under invested hurts relative performance in an upward market but it is hard to invest a portfolio all at once. I am at the end of the quarter holding 24% in cash and 19.3% in gold with only a 56.7% investment level in equities.

I expect to continue to under perform for as long as the wider market and especially the S&P grinds higher. The stronger GBP also has a negative impact on performance in absolute but not relative terms due to around 40% of the portfolio being in FX (mostly USD) and another 19.3% in Gold which acts as a proxy currency.

Stocks: The Worst and Best

My worst positions have been in US Energy and  Retail. 

These sectors have been laggards due to poor oil prices and weakening consumer spending. Value investing means looking for value often ahead of market turning points - immediate pain for long term gain.

I continue to think both Diamond Offshore and Bed, Bath and Beyond are undervalued fundamentally and the sectors as a whole are in a depression. This will likely continue for the medium term so I do not plan to add to these positions - but when energy demand increases and consumer spending rises I expect very strong performance from these bombed out sectors. 

The value of my holding Diamond Offshore is down around 16% over the period. The value of my holdings in Bed, Bath and Beyond is down 23%. 

Similarly my UK investments in these sectors; Next Plc and Tullow Oil have also been struggling but I have recently added to these on weakness.

The best positions have been in Gold Miners and IG Group. 

The Gold Miners have started to pick up a bit with Kirkland Lake having very strong performance up 19% due to exploration and insider buying alongside the removal of the GDXJ hangover. Acacia Mining has been up and down but is flat at 30 June awaiting news. Klondex has been outperforming too with only Goldcorp lagging a bit.

IG Group has been grinding higher since the big sell off on regulatory fears in December 2016. The stock is up 8% in the period in part due to benign regulatory actions in Europe. However a new Eurozone wide probe is delaying the UK regulatory enquiry until next year! This means the stock is 'dead money' for now to my mind but with a healthy dividend  I am happy to hold for now awaiting regulatory settlements.

Unfortunately these outperforming positions are some of my smaller ones. 



I sold my TLT bond ETF on the 14th of June following the Fed speech from Yellen. I made 3.5% overall. It seems to me that despite falling inflation the Fed seem intent on raising interest rates. The US credit growth is slowing and looks recessionary so if they were managing the economy this would be a bad idea. I believe this is because they in fact are trying to manage the level of the stock market - which has gotten rather too high. Rising rates and falling inflation is a bad environment for owning long duration bonds as the real interest rate picture will improve. 

Short term TIPS yields have all risen this month indicating rising expectations of higher real interest rates. Whilst I think the long term outlook for TLT is strong we need to see dovish moves from the Fed amidst the next recession before this really comes to the fore. So this is a tactical sale.

I bought SQQQ.

SQQQ is a 3x levered ETF which synthetically replicates the returns of the NASDAQ 100. As you will know I consider US stocks to be overvalued principally driven by overvaluation in the NASDAQ tech stocks. This is obviously a risky investment as if the index rises 30% I lose 90% of my position. However given that the Fed seems intent on attempting to 'manage down' the stock market a bit these stocks are highly vulnerable to a significant correction. 

Stocks like Apple, Amazon, Google and Facebook are all great businesses but the price of these companies is frankly outrageous. Similarly Netflix or Tesla are not even good businesses and their prices are even more outrageous. I am looking for a correction of at least 10% in the underlying index and probably more like 30% due to the fact that these stocks are likely being driven higher by passive ETF flows and algos which only know how to buy a bull market...what happens when that goes into reverse?

So this position (I wont call it an investment - it is tactical) - is a 3% of the portfolio. Now it is 3x levered so the real exposure is 9% of the portfolio and it is short so I now have the following levels invested:

Long Equity - 53.7%
Short Equity - 9.1%
Net Exposure - 44.6%

I consider SQQQ downside insurance against a broader drop in the stock market as this seems one of the most vulnerable areas.

Amiable Minotaur Portfolio

Gold Stocks

I continue to like Gold Mining stocks and have added to my position in Klondex Mines which has started to move upward as we move away from the GDXJ rebalancing debacle. 

I also continue to hold Acacia Mining as we await developments in Tanzania - now the big guns at Barrick Gold have weighed in I foresee some kind of revised royalty terms and a resumption of exports hopefully within the next month.

Kirkland Lake announced new exploration results which were very positive and the stock also has been gaining some momentum. If the gold prices moves up I expect these stocks to do very well.

I continue to hold some Goldcorp to give big-cap diversified exposure to gold.

Weights are:

ACA        2.7%
KLDX    4.7%
KL          1.8%

GG          2.4%

On the topic of Gold

I have been selectively adding to my Gold ETF position in GBSS and this now sits at 19.3% of the portfolio. I am reluctant to take any holding over 20% of the portfolio but have been keen to move cash away from GBP with recent strength in GBP and weakness in the Gold price. GBP cash stands at 22.8% with 1.2% of the portfolio cash in USD (most USD exposure is invested.)

Aside from ones view on Gold overall the negative real interest rates in the UK make holdings some Gold over GBP cash a 'no brainer' as far as I can see. Gold also acts as a cash proxy and with only brokerage to pay on ETF transactions it works out a lot cheaper to buy than FX. The only reason to own GBP over gold would be a significant change in the rate picture for the BOE - but with UK inflation running at around 3% and rates on the floor the BOE have a long way to go to create positive real interest rates. Recent hawkish comments have had some impact on GBP and I have taken this as an opportunity to add to gold. 

The BOE are behind the curve on rate rises vis-a-vis the Fed in my opinion as they have nowhere to go as the next recession hits except more negative. 

This is one reason I stay bullish on Gold - it is not really wealth creation only the protection of purchasing power.

Total Gold exposure is 31% of the portfolio (Miners + Physical ETF).

Position Sizes

My biggest positions in terms of sectors are Gold Miners, Retail and Energy. 

Amiable Minotaur Portfolio

My biggest single stock position is Next plc at 7% which I added to on recent weakness. I continue to love this depressed stock - it has brilliant capital management, a flexible business model, excellent high street and internet presence and a strong mid market proposition. I think it is seriously undervalued. The market disagrees.

I also have upped my Tullow Oil exposure  to 5.5% as a trade on higher oil prices. The recent sell off to new lows in oil last week lead to excessive bearishness on the oil price. I expect some OPEC 'news' imminently to prop up prices - they may have low well head prices but they have big social budget constraints and the Saudis in particular have a major cash flow problem for their handout based social model.

Remember I sold down TLW from an older portfolio around the rights period after it ralled ex rights to £2.40 a share! I have been buying again under £1.60 as TLW has improving cash flow generation and low cost offshore oil production.

Interestingly my smallest stock exposure is Guaranty Trust Bank at 1.4% which has proved a great performer up 15% since April 24th. This is highly illiquid though so big trades can move the price significantly.

An Observation

I tend to prefer Mid cap stocks and small caps to large caps at this point. This is really a bottom up observation as I haven't been looking for any particular cap size. My only large cap holdings are Goldcorp and then SQQQ and IBZL ETFs which are principally large cap.

Amiable Minotaur Portfolio


I remain bearish overall as regards the wider market. Volatility is very low, equity prices are very high, central bank liquidity is very high, interest rates are very low. Not exactly fertile conditions for findings assets at attractive prices. I remain long term bullish commodities and associated stocks and gold due to under valuation vs financial assets. 

Clearly my investments in Energy and Retail have been a touch too early but I still believe both sectors are signalling recession and will be the first places to pick up on the other side of a downturn.

Disclaimer: I have an interest in all the securities mentioned in this article at present but i may change these in the future. These are opinions only, not investment advice. Construct your own portfolios with due care and attention.  If in doubt read my disclaimer.