The Dirt Cheap Value Portfolio: Offering Safety And Reward

by: Mark Krieger


FSYS's recent implosion makes its bargain metrics even more compelling.

The safety oriented "DCVP" outperforms the DJIA again.

Diamond Foods' meteoric rise leaves it too pricey for continued inclusion.

It has been six months since I have given an update on the Dirt Cheap Value Portfolio ("DCVP"), so here it is. At the conclusion of my last report on Oct. 21, 2013, the index stood at $68.33, while the Dow Jones Industrial Average marked a tally of 15,392. Since then, the Dow has risen 4.4% to 16,066, while the "DCVP" notched a healthier 4.9% gain to $71.69. Three components managed gains, while two fell. The big star of the group was Diamond Foods (NASDAQ:DMND), rocketing up a impressive 49%, followed by JetBlue Airways (NASDAQ:JBLU) tacking on a respectable 17% markup. Fuel Systems Solutions (NASDAQ:FSYS) won the booby price for the worst performance, by experiencing a 42% bloodletting, followed by Luby's (NYSE:LUB) disappointing 17% slashing. The Pep Boys (NYSE:PBY) was essentially flat during the period, eking out a 1% gain.

Due to DMND's rapid appreciation, its metrics no longer qualify as bargain status, so it has been replaced by Bridgford Foods (NASDAQ:BRID). The snack food producer owns 5 processing plants, generates sales of $100 million and is debt free. Its largest shareholder is the Bridgford family (they are also involved in all facets of upper management) which controls 81.1% of its 9,132,000 shares outstanding, so it is fair to say, management has ample "skin in the game," perfectly aligning their interests with shareholders.

The lineup

JBLU: The shares have been on fire lately, and have recently hit new 52 week high territory, before a slight pull back. News of their sale of their LiveTV division to the Thales Group for $400 million pleased the investors. In addition, the stock is looking cheap at a forward multiple of just 12 times 2014 EPS estimates of .70 (implying a rather hefty growth rate of 35%). I am raising my target 38% from $8 to $11, which happens to be 10% above the mean analyst target price of $10, but $2 below the highest target of $13.

LUB: Its second quarter earnings will be reported March 24th before the market open. The report could be challenging due to the harsh winter that Texas experienced. The company should provide color on its new culinary contract, which started in March (a 750 bed hospital system). The restaurant chain is also expected to provide a more detailed update on its current expansion program-especially its dual location concept. The shares have been range bound and are currently trading at their low end, so accumulation at these levels is advisable. Price target: $8

FSYS: The company reported its 4th quarter results that were basically in line with expectations. However, its 2014 guidance was worse than expected, when it revealed a sales range of $340 to $360 million, versus a $390 million consensus. This amounts to a hefty 8% to 13% shortfall. It also gave a "EBITDA" range of $14 to $20 million. The market was obviously annoyed by the poor guidance and as punishment, quickly marked down the shares 12%, matching lows not seen since March 2009.

All hope should not be lost, as there were some positive developments in 2013: (1) its cash and investments blossomed 16% from $83 million to $96 million, (2) shareholders' equity rose to $319 million, (3) its already bargain-based metrics became even more outrageous when factoring in the shares' recent implosion. Believe or not, the stock trades at just .61 of 2014 sales estimates of $350 million, .75 of book value, and 45% of cash/investments on hand.

During its 4th quarter conference call, an analyst asked why they don't not have a stock buyback plan in place, and management indicated that although a buyback is an option, they currently have better uses of their cash. I strongly disagree; there is not a superior way to utilize their monies. At the very least, they ought to authorize a stock repurchase plan. This allows them the flexibility to purchase shares when an appropriate opportunity presents itself.

It was also revealed that FSYS could be heading towards the Merger and Acquisition path, by focusing on opportune acquisitions in the alternative fuel provider space. In addition, management indicated it is attempting to renew its credit facility. Although, I was totally disillusioned with their latest update, I still see the company as a compelling investment, however, I am lowering my target price a substantial distance, from $25 to $16.

BRID: This one has seen its Wal-Mart (NYSE:WMT) business nearly double in the past year, from 14.3% of total sales to 27.2.%. It also has gained nice traction with Dollar General, which now accounts for 11% of sales. The company saw its cash position rise a nifty 38% from $8.3 million to $11.43 million. BRID's successful 2013 and large cash position should be just the right catalyst for declaring another 5 to 10 cent cash dividend. The snack food maker has 177,000 shares of stock remaining under its 2 million share buyback authorization.

Recent developments include the introduction of a single serve monkey bread, a campaign to acquire more school district business (focus on healthier bread products) and a priority to obtain more convenience store commerce. The company is nearing the $100 million market cap threshold, which would allow it to be included in the Russell 2000 index. Achieving a $100 million market cap would force the index to buy shares, and with a float of just 1.7 million shares, you can rest assured any type of index buying would have a rapid and very powerful impact on the stock price. Price target: $13

PBY: The company is set to report its 4th quarter earnings next month. Analysts expect "the boys" to put up sales of $535 million, versus $530 million the previous year. The "street" also anticipates earnings of 5 cents versus 3 cents. These expectations could be too light when considering the company has been on an expansion quest lately, buying up tire stores (it recently acquired 18 Southern California stores). Look for the auto parts purveyor to beat expectations by producing $540 million in sales and ESP of 6 cents. The other promising development is Mario Gabelli's strong interest in the company. He has recently raised his stake to 13.66% while Dimensional Fund Advisors quietly ratcheted up its holdings to 8.48%. Price target: $14

The bottom line: The "DCVP" portfolio gives you more bang for the buck, but with much less risk. Why? Because the risk has diminished, as its components are already out of favor. Translation: They simply do not have as far to fall, since they have already fallen and hit rock bottom. The current "DCVP" registers an index reading of $48.55, while the Dow rests at 16,066. In the next six months, the probability is high, the "DCVP" will again outperform the market averages. You can bet on it.

Disclosure: I am long BRID, PBY, JBLU, LUB, FSYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers a stock trading at less than $1 per share and/or has less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.