Seeking Alpha
What is your profession? ×
Long/short equity
Profile| Send Message|
( followers)

It was a very rough week for the "BFF". The bulk of its components were dealt relentless selling, as any subsequent rally attempts were greeted with even more sellers - the mentality of sell now and ask questions later was definitely the theme. The bottom certainly has fallen out of the "BFF" lately, but is the carnage over? It could be for the short term. Most of the stocks comprising it are way oversold and have dropped too much in too short of a time frame.

It certainly looked like the herd being led to slaughter in the process, as the smart money extracted shares from the weak hands, easier than taking candy from a baby. This very negative sentiment could be a sign a bottom is nearing. I am tempted to buy more shares, but after getting my head handed to me on a plate while simultaneously being kicked repeatedly while I was down has shaken my confidence. The market forced a huge wedge of humble pie down my alimentary canal, and I think I'm still choking on it. Since 2/9, the "BFF" index has dropped a whopping 14% from $145.91 to $125.08, much worse than the DJIA's slump of about 9% in the same time frame. Food stocks are generally supposed to be safer investments, but this time, that premise didn't hold water .

Where is the DJIA headed?: My crystal ball is no better than anyone else's, in fact, it is probably worse, but I do realize the trend is your friend, and the trend is down. A 33% drop on the Dow to the 5000 area is not out of the question, and is getting less far fetched as more and more events unfold. I am a proponent of just getting the carnage over with, so we can have a clean slate in front of us with minimal downside risk around the bend.

It would be comforting to know we have hit bottom. The Dow at 5000 is still five times higher than it was when I was in college, so even at that level, there could be room for more contraction, but the chances would be minimal, therefore, I would presume 5000 on the Dow would present a monumental buying opportunity.

Component update:

JetBlue Airways (NASDAQ:JBLU): Bad news from the International Air Transport Association, reporting premium air traffic (first and business class) fell 13.3% in December, while economy class dropped 5.3%, was not what the Dr. ordered for airline investors.This news crushed JBLU's stock yesterday along with every other major carrier. It was certainly an overreaction in my book. Caylon Securites analyst Ray Neidel expects the low price of airline stocks coupled with a lower chance of bankruptcy filings should help the sector move higher in the spring. JBLU's 15% loss yesterday puts its current share price equal to its price when crude was near $130 a barrel. It seems the 80% drop in crude so far has done little to bolster JBLU's share price, as lunacy prevails again.

Smithfield Foods (NYSE:SFD): The largest U.S. Pork Producer announced it was cutting 1800 jobs, closing six plants and consolidating 7 operating divisions into three. Its restructuring efforts should produce big dividends. Cost savings are expected to be $180 million over the next two years. Deutsche Bank-North America analyst Christina McGlone said late Tuesday, that the cost-cutting efforts are good news, but warned "execution risk exists." The plan to finish the restructuring by December could be aggressive, but it is necessary amid an overall slump in the industry, she added."In the midst of demand uncertainty, tight credit conditions and uncertain feed costs, it makes sense, in our view, for Smithfield to embark on a company specific effort to streamline operations, improve capacity utilization and garner cost savings," McGlone maintained her hold rating on the stock with a $10 price target. Her opinion on the shares appears extremely conservative.

Pep Boys - Manny, Moe & Jack (NYSE:PBY): Glenhill Advisors doubled its stake from 7% to 14%. Advance Auto Parts' (NYSE:AAP) stellar results after the bell should help the entire auto parts retailing sector in a sympathy move. AAP's same store sales increased 3%, and its gross profit margin ballooned to an impressive 48.5%, shooting its shares up more than 10% in after hours trading. The poor economy is obviously forcing consumers to repair their cars rather than buy new. This trend could be around for a long time to come, further benefiting this sector.

Imperial Sugar (NASDAQ:IPSU): The sugar producer set a new all time low of $8.70 before making a nice recovery, closing at $9.10- It looks like the stock may have seen a capitulation, as the balance of its "weak hands" may have finally given up, by bailing out at the lows of the day.

Bridgford Foods (NASDAQ:BRID): The snack food maker laid out its fiscal 2009 game plan and highlighted its Fiscal 2008 operations through its annual letter to shareholders. The company saw its Monkey Bread sales rise 18%, and demand for its "first strike" rations was strong enough to warrant the company to add a new production line at its NC plant to expand production. Management also announced it has entered an agreement with Snyder's of Hanover (the pretzel baker) to offer BRID's snack food meat products in conjunction with its own lines. This action could boost sales significantly.

CEO William Bridgford, the founder's Grandson, indicated the company will emphasize selling its own products, rather than reselling products procured from other sources in order to expand margins. The company also streamlined its Anaheim deli operations by eliminating unprofitable products and focusing on value-added sandwiches and meal kits. In addition, BRID announced the reorganization of its direct store delivery system to a more focused streamlined entity. New exciting products introduced were a fat free biscuit marketed to school districts and low fat turkey sausage and turkey pepperoni fare targeted to the "heart health" consumer.

CKE Restaurants (CKR): The burger chain announced further expansion into the Dallas and Houston, Texas markets. Franchisee "Star Foods", indicated it plans to open 72 locations, on top of the 121 locations proclaimed six weeks ago by another franchisee. Nelson Peltz, of Trian Partners fame, recently purchased a 2.1 million share block. Peltz is known as an aggressive activist investor whose firm controls the Wendy's/Arbys group. Richard Pickup, CKR's largest shareholder, has picked up even more shares and now owns a 10.6% stake. CKR also presented at the Roth Capital Partners Annual Growth conference on Wednesday, Feb 18th.

Bottom line: Do I think the markets can drop another 30%? Probably not, but I certainly wouldn't rule it out either. I just want to be prepared in case it does happen. I want to stay on the same side as the trend. Going short in high multiple, high debt stocks, would not be a bad idea. I would shy away from large long positions, other than gold stocks and the very beaten down oil sector.

In other words, I would keep my powder dry at this juncture, as cash is king. When the dust finally settles and we emerge from our bomb shelters, we will be presented with the opportunity of a lifetime in the equity markets. You will want to buy everything that is still standing at that point, utilizing full margin buying power to leverage your positions to the maximum possible. That is precisely how fortunes are made.

Relevant holdings: CKR, BRID, SFD, JBLU and PBY, other components of the BFF include: WINN, SVU, GAP, SWY,IPSU,CAG, TSN, SCS and SLE