The Dirt Cheap Value Portfolio: Still A Bargain Despite Recent Gains

by: Mark Krieger


JBLU's tremendous run shows no sign of slowing.

The "DCVP" performed at nearly twice the rate of the Dow.

PBY's 1st quarter results should provide buying opportunity.

LUB is already priced for a weak 3rd quarter report, and high short interest is a rally catalyst.

There is no doubt that the "stock market gods" have been really good to us. We are rolling along making new highs, with little worry in the air, and bullish sentiment registering very high levels (actually that worries me). The DJIA has risen 2.9% to 16,924 since my last update, while the "DCVP" fared better, climbing 5.5% to $45.19, despite 60% of its members losing ground during the period.

Thanks to a magical 38% rise in JetBlue Airways, coupled with a respectable 4.5% gain in Pep Boys, the portfolio was able to offset losses attributable to Fuel Systems Solutions, Bridgford Foods and Luby's (each stock lost about 10%). In fact, both FSYS and LUB carry lower market caps today than they did during the peak of the financial crisis, despite markedly improved balance sheets.

The lineup:

Luby's Inc. (NYSE:LUB): The company reports its third quarter results this Thursday, after the close of market. The only firm that provides research coverage on Luby's, is Sidoti & Company with a neutral rating in place. Their analyst (James Fronda), has forecasted earnings of 3 cents, although no revenue figure were supplied. Taking into consideration higher food commodity costs, the company should report a loss of 3 cents, on sales of $98 million.

The results will likely have little impact on the direction of the stock, because this event has likely been factored into the share price and then some (the share price has already lost almost 50% of its value in the past few months, hitting a new 52 week low). Wall Street will be more interested in the company's guidance update, rather than past history. I wouldn't be surprised to see the shares rally on the news, simply because they are so severely oversold.

One thing for sure, the restaurant operator will not be able to blame any revenue shortfall on poor economic conditions. The Texas economy has been on an absolute tear lately, with no letup in sight.

Expansion of footprint: The comfort food purveyor is on schedule to open ten new Luby's/Fuddruckers dual units this year. Although I appreciate the effort, I would prefer management focus on cost cutting and debt reduction. After all, if the company is unable to turn a profit, when it doesn't have to pay rent on 50% of its locations, there has to be plenty of operational fix still available.

Franchise Development: A new franchisee opening in Kendall, Florida is Luby's latest conquest in its Fuddrucker's franchise operations. In addition, it has franchise agreements put in place to add another 30 international and 24 domestic locations. This creates a nice earnings stream, because franchises are required to remit 5% of their sales to the franchiser (currently LUB derives about $8 million in sales per year from its 112 franchise locations).

In addition, there is potential for a serious short squeeze to develop, as the amount of shares sold short, in the latest period has grown 35%, from 470,000 to 635,000. This represents its largest short interest in the past 12 months, or five times greater than its January reading. Translation: LUB is a low float, thinly traded issue. The short shares represent future buying fuel, as they will ultimately have to be purchased back, by those who borrowed them. A serious short squeeze could develop as a consequence.

Target price: reduction from $9 to $8

Fuel Systems Solutions (NASDAQ:FSYS): The stock continues to be a major disappointment, dishing out plenty of pain and torture to those who are still unfortunate to own it. There were some glimpses of light at the end of the tunnel, revealed during its latest conference call: (1) Political unrest in Venezuela is beginning to show signs of ease - this could restart sales that have been previously shut down; (2) in 2015, the European Union will be subject to more stringent emissions requirements -this could bode well for demand of CNG and LNG vehicles; (3) picked up a large compressor contract from Turkey; (4) the direct injection market is gaining traction; (5) it intends to open a Chinese sales office; (6) payroll cuts in Europe will begin to pay dividends at the beginning of 2015.

On the other hand, there is still negative overhang present: The company refuses to buy back shares, despite a pristine balance sheet; (2) its communication efforts continue to woefully underwhelm; (3) Kinder Morgan's tagline, "run by shareholders, for shareholders" does not appear to be embraced by FSYS. My perception is that shareholders are viewed as more of a nuisance than a partner - especially bizarre considering the CEO has plenty of skin in the game with a 16% stake of his own; (4) The complexity of the business is daunting. (5) shareholders continue to suffer as the stock languishes near nine year lows.

Second quarter expectations: Its second quarter earnings are forecasted to produce a 90% drop in earnings from 13 cents to 1 cent. Revenues are expected to drop 20% from $111 million to $89 million. This outlook could be too harsh, offering FSYS a golden opportunity to finally surpass, and injecting some life into its long suffering stock price.

Target price: reduction from $12 to $11

JetBlue Airways (NASDAQ:JBLU): This one has gone parabolic, and has made a new five year high. In fact, it still could nearly triple before it reaches its all-time high of $30, although I wouldn't hold my breath for that milestone achievement. The company's acquisition of 40 landing/departing slots at Reagan Airport is encouraging. It is also aiming to add 24 daily round trip departures to eight cities from the same location. In addition, it's seeking to enhance its Fort Lauderdale offerings. One big negative - increased Pilot compensation looming, due to its recent adoption of union representation.

Target price: increase from $9 to $12

Other members: Bridgford Foods (NASDAQ:BRID) showed a nice sales improvement in its second quarter, with a brisk 9% rise. The sales rise, however, was not enough to prevent the bottom line from turning red, due to escalating meat prices. The aggressive bidding war for fellow snack food maker Hillshire Brands (NYSE:HSH) indicates there is still plenty of strength in the sector.

Target Price: $10.50

The Pep Boys (NYSE:PBY) reports its 1st quarter results this Tuesday before the market open. Analysts expect earnings to drop from 7 cents to 6 cents on a 1% sales gain to $542 million. Based on PBY's poor track record of earnings disappointments, a miss is probably in the cards, so look for the opportunity to buy lower.

Target price: reduction from $13 to $11.50

As far as the "DCVP" is concerned, trying to pick a bottom on its underperforming components is a futile effort. Wait to buy after evidence of fundamental improvement transpires. Although you will have to pay more, obtaining the trend in your favor will be worth every penny. In the meantime, don't be afraid to book a profit on your juicy gains - no one has ever gone broke doing so.

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

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