Bridgford Foods: Priced to Sell

| About: Bridgford Foods (BRID)

You might have to have a cast iron stomach to handle what Bridgford Foods (NASDAQ:BRID) has dished out lately, and it isn’t the case of some bad salami prompting a sprint to the reading room, but something far worse - a giant hit to the wallet.

The company’s stock has literally disintegrated this past year, losing almost 66% to decline to $2.57 per share. At a current market cap of a mere $25 million, you couldn’t even buy the land and erect a single processing plant, yet alone the five major processing plants BRID has in operation. The strange thing is, this is a food company (in a defensive sector) with zero debt and a seasoned management team in place which owns over 81% of the outstanding shares. The company has also embarked on an aggressive, two million share stock repurchase program (so far repurchasing 1.6 million shares). This type of meltdown is just not supposed to happen to a company like this, but it did.

The company is conservative: Its top five executives all earn a salary of $202,800 per year. There are no perks or stock options. Its corporate headquarters lobby looks more like a Greyhound bus station waiting room than a typical richly appointed corporate setting. Believe it or not, the CEO does not even have his own secretary, and the annual shareholders' meeting is held in his office. In other words, management watches every dime, as it should (it's basically their money anyway), though it might from time to time walk over a dollar to pick up a dime. Nobody’s perfect.

The shares hardly trade: When you only have about 1 million shares available for trading (the effective float) the stock trades very little; in fact, days can go by without even a single share changing hands. The stock’s average daily volume of 232 shares, says it all. This obvious lack of liquidity makes buying or selling the shares very difficult to do without having an enormous impact on the share price in either direction. BRID’s market cap fell by 20% (about $5 million) Tuesday, on a volume of just 1200 shares. To put this in perspective, a $3100 stock trade caused a market cap loss of $5 million, equating to an unbelievable 1600 times the value of the shares traded.

The problem: lack of earnings. The company blamed its red ink on spiking commodity prices. There are plenty of other food companies that recently made a good deal of money with the same high input costs, so management needs to adapt in a more timely manner to changing market conditions. It is not a matter of “if” it will be profitable again, but “when”. The “when” could be very soon, and being long this equity during its recovery phase could be extremely rewarding. We could find out as early as this Friday, when the company is expected to release its first quarter results.

The Bottom line: Once this snack food producer starts making money again, and it will, its shares will rise violently and quickly. Its lack of trading volume will make it that much harder to accumulate any sizeable position. That is why it is important to already have a position in place before the turnaround occurs. It will simply be too late to buy the shares without chasing them after the good news is out.