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This gun manufacturer's stock passes model portfolio tests

A visitor tests a Smith & Wesson gun model M&P9, 9mm, at the MILIPOL International State ESecurity Exhibition in Paris.

Regis Duvignau/Reuters

Validea's pick of the week provides a detailed report on a company that scores well in the stock-screening service's model portfolios. On, investors can analyze 1,000 Canadian stocks through 12 different guru-based models and get individual reports on each company. Globe Investor provides marketing and data services to and receives compensation. Try it.

Smith & Wesson (SWHC-N) is a manufacturer of firearms and a provider of accessory products for shooting, hunting and outdoor enthusiasts.

The company's P/E-to-growth ratio of 0.34 is considered very favourable by my Peter Lynch-based investment model. SWHC's P/E ratio is at 13.64, while the company's growth rate is 40.37 per cent, based on the average of the 3-, 4- and 5-year historical EPS growth rates.

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Smith & Wesson's inventory-to-sales ratio also passes the Lynch model test, as the ratio decreased from last year by 3.17 per cent.

It scores highly in my Joel Greenblatt-inspired model, based on an earnings yield of 11.97 per cent and a return on total capital of 46.32 per cent.

It's also ranked highly by the Validea Momentum Investor model, with a score of 89 per cent. This model looks for earnings growth about 18 per cent but prefers figures over 25 per cent. Smith & Wesson passes this test by a wide margin.

The company's earnings consistency is also favoured by the Validea Momentum Investor model. According to this methodology, each year's EPS numbers should be better than the previous year's. One dip is allowed, but the following year's earnings should be a new high. SWHC's annual EPS before extraordinary items for the last five years were 0.40, 1.22, 1.47, 0.90 and 1.68.

Relative strength is another metric favoured by the Momentum Investor model. Smith & Wesson's relative strength has been increasing over the last four months and is at an exception level of 90.

Click here for a complete breakdown of Validea's investing guru report.

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