Relief Rally Fattens Basic Food Fund

by: Mark Krieger

The Dow has put together a nice string of four up days in a row, a feat which has not happend for several weeks. This recent strong market action has tacked on nearly 16 % to the DJIA, but added a nicer 19% gain to the Basic Food Fund (BFF), climbing from $110.22 to $131.14. The Basic Food Fund’s appreciation was 18% greater than the DJIA, which is a bit disappointing, considering it collapsed at a far greater rate than the overall averages.

BFF to Double?: it might be prudent to make the BFF your “best friend forever”, because it has the potential to double by next year and ultimately achieve a marvelous “ten bagger” (Fidelity Magellan’s Peter Lynch’s term), to $1331, within the next decade. I know this prediction could be construed as a “pie in the sky” antic, but skeptics would have said the exact same thing about a prediction three months ago by anyone prognosticating that these same equities could realize a sudden 60% erosion of their market cap. The bottom line is that in these volatile times, few predictions are too far fetched. Do you think ten years is too long a holding period? Not too long for Warren Buffett; his favorite holding period is “forever”.

Buffett’s Philosophy Tweaked: Buffett maintains that it is far better to buy a wonderful company at a fair price, than a fair company at a wonderful price. I agree to a point, but would add that it’s a far better plan to buy a wonderful company at a fraction of fair price, and the BFF comprises a group of very unpopular though wonderful companies selling for pennies on the dollar. It all boils down to buying low and selling high. To buy low, you must select unpopular stocks, and to sell high necessitates unloading them after they become popular.

Component Update

ConAgra Foods (NYSE:CAG): The company announced a $4 billion shelf registration to sell equity ,debt or a combination: The shares dipped on the prospect of additional dilution. UBS analys David Palmer cut his target price from $21 to $15

Safeway (NYSE:SWY): The grocer will be presenting at an investment conference on 12/4. The stock has shown recent relative strength rallying 24% from its lows.

Smithfield Foods (NYSE:SFD): The shares spiked 12% on Wednesday. The pork producer is slated to report its second results on 12/4 and is expected to lose 8 cents on sales of $3.2 billion.

Tyson Foods (NYSE:TSN): The stock soared 13% on Wednesday in a partial sympathy move with PPC’s successful loan waiver extension agreement announcement.

Pep Boys (NYSE:PBY): The auto parts retailer has advanced 55% off its historical lows, including a nice 10% markup on Wednesday. The company is expected to report third quarter results on 12/10. Analysts are forecasting a break even quarter on sales of $480 million.

Imperial Sugar (NASDAQ:IPSU): The company should be releasing fourth quarter results on 12/10—IPSU’s lone analyst has pegged the sugar producer to generate sales of $107 million, but producing a loss of 67 cents.

The Great Atlantic & Pacific Tea Co. (GAP): The shares have bounced an impressive 57% from their all time lows, including a 12% gain on Wednesday. The Tengelmann Group and affiliates have purchased an additional 250,000 shares throughout November and now control over 50% of the voting shares. The company’s senior bonds (aka “QUIBs”) have been hammered as of late, and as a result now yield a staggering 21%. Bold investors looking for a sweet return may want to consider these bonds as a safer alternative to the common, as they possess a much higher priority to the company’s assets in a reorganization scenario.

SUPERVALU (NYSE:SVU): After falling to a 17 year low, SVU has finally attracted some buying interest as its shares have already bounced 31% from last week’s low of $8.59

CKE Restaurants (CKR): The parent company of Hardee’s and Carl’s Jr. will report third quarter earnings in mid December. Analysts are expecting the company to earn 11 cents per share on sales of $342 million. On Wednesday, Sun Trust raised its opinion on the stock from neutral to buy and the market was most receptive, rewarding the stock with a impressive 22% gain.

Steelcase (NYSE:SCS): The shares are up 24% from their lows. Moody’s has indicated a possible downgrade due to the weak economy. SCS’s debt is rated at the lower end of investment grade.

Jet Blue (NASDAQ:JBLU): The shares have continued to soar due to the collapse of oil prices. In just the last three sessions, the shares have gained more than 28%.

Sara Lee (SLE), Winn-Dixie (NASDAQ:WINN) and Bridgford Foods (NASDAQ:BRID): SLE is up 18% from its lows, whereas WINN has seen its share price beefed up nearly 50%. BRID’s thinly traded shares have crossed a total of 19000 shares, in the last 36 trading sessions combined, computing to a meager average daily volume of 527 shares.

Bottom line

The BFF is not out of the woods yet. Future volatility is “in the cards”, partially due to the severity of the decline of the components within in it. Many of its stocks will be subject to year end tax selling, allowing holders the ability to offset their losses against their profitable positions.