The Dirt Cheap Value Portfolio: A Rare Bloodletting Offers A Buying Opportunity

by: Mark Krieger


The DCVP exhibited poor relative strength by falling heavily, compared to the Dow Jones Industrial Average.

A large purchase by a Luby's insider prompts a target price hike.

A horrible month in the DCVP creates a decent buying opportunity.

There is no doubt the Dirt Cheap Value Portfolio (DCVP) experienced a very rough past four weeks. Despite the Dow being relatively flat in the same period (just a .2% drop from 16,066 to 16,027), the DCVP fell a staggering 5% from $48.55 to $46.03. Usually, defensive value plays fare much better in market selloffs than the average equity, but not this time.

Two mediocre earnings reports from both Fuel Systems Solutions and Luby's Inc. were likely the catalyst, along with a weak Nasdaq showing, exacerbated the fall. In fact, players of the DCVP would have been better off going to Las Vegas-they'd have come up with lucky "777", as 60% of the DCVP's components, all coincidentally fell 7% each (FSYS, LUB and PBY). What are the chances of that?

The lineup:

Fuel Systems Solutions (NASDAQ:FSYS): The bad news is continued hate selling has caused the shares to hit a new 52-week low. The good news is its recent weakness has been on contracted volume (implying the smaller retail investor has been exiting versus the smart money). Another positive way to look at its recent carnage is the stock is just a $4 drop away from selling at net cash value, which would certainly create some kind of floor. Secondly, the lowest analyst target price of $11 is higher than its current beaten down price - a rare occurrence indeed.

The company is slated to release its first quarter earnings next month. Analysts are going bearishly overboard in their forecasting models, predicting a 17% revenue fall to $82.16 million. This sales estimate translates into a 5 cent loss versus 4 cents in the red. These very low expectations could enable FSYS to finally produce a beat.

With an enterprise value of just $104 million, and expected EBITDA in the current year of $16 million, this produced multiple of just 6.5 screams value. Add in the fact that the company sells at just .51 of annual sales and .63 of book (shareholders' equity) and you have the recipe for an epic value play. However, the company's continued unwillingness to authorize a stock buyback and its lack of urgency in its turnaround efforts has manifested a target price decrease from $16 to $14.

JetBlue Airways (NASDAQ:JBLU): Despite getting some love last week from a Goldman Sachs' upgrade ( from sell to neutral), the shares slumped. The stock's selloff could have been attributable to an unimpressive .9% rise in traffic (revenue passenger miles) and the overall weakness in the Nasdaq. The good news is the company is about to report a spectacular first quarter earnings report that is expected to show 80% earnings growth (from .05 to .09 EPS) on just a 6% rise in revenues. As a result of the Goldman upgrade, I am upping my target price from $11.00 to $11.50.

Bridgford Foods (NASDAQ:BRID): Although higher food commodity prices will wreak havoc on the company's gross profit margins, new business captured from Walgreen, Circle K, and Meijers will likely have an offsetting effect. Although the company is not set to light the world on fire, its stability and strong financials make it a great holding for ultraconservative investors. Price target reduction from $12 to $10.50.

Pep Boys (NYSE:PBY): The auto parts chain is set to release its fourth quarter earnings this Tuesday, before the market open. Earnings are expected to rise 66% from 3 cents to 5 cents on essentially flat revenues of $535 million. It will be interesting to see if the company's recent quest to acquire small service centers is gaining traction, as management has claimed this strategy is a game changer. Target price remains at $13.

Luby's (NYSE:LUB): Unfortunately, its shares also made a new 52-week low. Maybe this is what prompted some good old fashioned insider buying to materialize. It could be that its newly deflated price was just too good to pass up for Outside Director Frank Martkonis. He laid down $118,000 of his own hard earned money to purchase 19,608 shares. This purchase increased his holdings 34% from 57,653 shares to a tally of 77,261. Always follow the insiders - their knowledge in their company's is the most intimate of all. Besides, they only buy for one reason - to make a profit. As a result of this very positive occurrence, I am lifting my target price 25% from $8 to $10.

The bottom line, the stock market is essentially a merchandising operation. Buying wholesale and selling retail is the name of the game. Translation: It is time to buy the dip, for the rip is sure to come (just don't be too greedy, to sell the rip).

Disclosure: I am long FSYS, LUB, BRID, JBLU, PBY. 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 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.