It’s the dream environment for investors… acompany with so much demand for its products that it recently had to stop accepting new orders. Think about that. And not only that, but this same companyis also benefiting from growing regulatory concerns that have its customers stockpiling its products. 

If that sounds like a compelling investment story, then you are not alone. 

#-ad_banner-#These rare market conditions have lifted shares of this rare, small-cap gem to a 90% gain in the past year and 140% in the last two years. But in spite of that market-beating movement, this stock still has plenty of fuel in the tank, currently trading at a discount to historical levels and the S&P 500 after plunging with the market in May.

The company I am talking about is Sturm, Ruger & Co. Inc. (NYSE: RGR), a domestic gun manufacturer with a market cap of just $640 million. The bullish movement in its share price in the last few years has been driven by surging demand. In fact, the company shocked the market on March 21 with its announcement that it would suspend new orders after hitting its production limit of 1.2 million units.

That surge in demand has lifted shares to huge gains in the last two years, which looked even more impressive last month before shares pulled back more than 37% from the 52-week high of $58.42. But longer term, that bearish movement belies three very good reasons to be bullish on Sturm & Ruger.

The first is politics. Whether we like it or not, politics always has been and always will be a huge part of the gun market. And in this case, fear over increased gun legislation has been a huge driver of demand. And that trend isn’t showing any signs of slowing down. Looking forward, with a presidential election on hand in November, the political environment will only get more intense.

Beyond politics, Sturm & Ruger is also focused on bringing new products to the market and creating additional streams of revenue. That was on display in early May, with new product introductions that included the Ruger American Rifle, SR22 Pistol and 10/22 Take Down Rifle accounting for an impressive 38% of total first-quarter revenue of $112 million. Sturm &Ruger is also benefiting from a growing network of independent distributors, with a sell-through increase of 62% from last year.

The recent pullback of about 37% presents a unique opportunity to buy a amazing growth stock at a huge discount. Sturm’s forward price-to-earnings (P/E) ratio of 12.8 is a big discount to the 10-year median of 21. A return to only the historical average implies 64% upside. 

That historically low valuation is also being driven by sharp upward movement in earnings estimates, with the analyst community raising earnings projections on the company’s strong first-quarter results. In the last 90 days, the full-year estimate is up 19% to $2.98 per share, a bullish 42% growth projection from last year.

A huge pullback
In spite of the company’s impressive growth, shares took a nose dive in May, pulling back 37% from peak to trough while the S&P 500 declined only 10%. But in the meantime, earnings and estimates have held steady, creating a unique value opportunity. Take a look at the dip below.

Risks to Consider: Sturm is a stock that has benefited tremendously from a huge cyclical shift in public sentiment. For the time being that has worked in its favor, but with emotions driving the investment thesis, that could change on a dime. The presidential elections this fall have a huge impact on that sentiment. A Republican administration would likely be bearish for gun stocks, as there would be no big hurry to buy guns with the prospect of regulation unlikely, while a Democratic administration would likely have the opposite effect and be more bullish for gun stocks. So if one side pulls ahead or shows a lead, then it will likely have a big impact on these stocks.

Action to Take–> Sturm is flying high from a shift in public sentiment that is creating surging demand for its products. But in spite of amazing gains in both sales and earnings in the last two years, the recent pullback represents an incredibly unique opportunity to buy a high-growth stock at a discount to the market and historical levels. If shares were to simply return to their average forward P/E of the last 10 years, that would imply a stock price of $65 and 64% upside from current levels. But even further out, with the industry clearly on the upswing, a small-cap player like Sturm &Ruger could be an ideal takeover target.