The Dirt Cheap Value Portfolio: Shooting Fish In A Barrel

by: Mark Krieger

Is the Dirt Cheap Value Portfolio -- aka DCVP -- akin to prospecting in the junkyard? Some say you get what you pay for, and as far as the DCVP is concerned, its price is so cheap, it could be argued that you are trading low price for low quality. Is this the case? Well, the way the index has performed lately, it just might be, as it has slipped a demoralizing 6% in its latest reporting period, from $92.57 to $87.54, more than twice that of the overall market.

Why the carnage? Partly because of the small retail investor overreacting to the headlines, by selling first and asking questions later -- it is simply a fear thing intertwined with moments of sheer panic. The question is: who is buying? The “smart money,” of course, because the smart money understands that bargains are had when others are fearful. The smart money is taking advantage of an abundance of low hanging fruit. Shouldn’t you pick some, before the tree is eventually stripped?

The components and their latest developments:

Pep Boys (NYSE:PBY): the company soundly beat its second quarter earnings estimates of 20 cents, by delivering 26 cents, but sales figures disappointed by $5 million, coming at $523 million. Now that earnings are on the rise again, its Board might decide to put it back on the auction block, after previously rejecting offers in the $10 to $12 range.

Luby's (NYSE:LUB): The company’s bankers must be impressed with its wherewithal, or else they would not havegranted them a three year extension on their credit agreement, increased their line of credit 40% from $50 million to $70 million, reduced their effective interest rate 75 basis points and offered more desirable financial covenants. The company is also forging ahead with new innovations, according to a Houston business journal.

Imperial Sugar (NASDAQ:IPSU): the consumption of Stevia is forecasted to grow from $211 million in 2010 to $1.2 billion in 2011, meaning Stevia based sweeteners US market share will increase more than fivefold from 1.8% to 9.1%. Hopefully, IPSU’s joint venture with Pure Circle (known as Natural Sweet Ventures) featuring SteviaCane will garner some of those sales.

Supervalu (NYSE:SVU): the company announced it was selling 107 out of its 134 fuel centers to monetize noncore assets. Now is the time to load up on this beaten down grocery operator, and Jim Royal of the Motley Fool must agree, as he penned a recent article describing it as a hidden gem.

JetBlue (NASDAQ:JBLU): the fact that a $8-10 million charge was announced due to the impact of Hurricane Irene adds insult to injury on this severely beaten down ariline carrier. At least management cares enough about the stock price to present this Tuesday, Sept 13th at the Deutsche Bank Aviation and Transportation Conference. A Barron’s article over the weekend mentioned that Airline analyst Ray Neidl is getting bullish on the sector because airline management finally had a “epiphany” that profits are more important than obtaining market share-a little silly, but we will take what we can get!

Safeway (NYSE:SWY): Morgan Stanley threw a little love towards SWY when they upgraded their opinion from underweight to equal weight, while chatter has recently popped up regarding the possible sale of its Genuardi’s 30 unit chain. In the meantime, KR’s lackluster earnings report managed to throw cold water on the entire sector.

Winn-Dixie (NASDAQ:WINN): the company’s CFO revealed that its transformational stores are racking up sales of an impressive $475 per foot (58% higher than its average of $300 per sq foot). WINN has already completed five transformational remodels and plans to complete another 15 within the next 12 months. If you do a little math, those 20 remodeled stores should add another $160 million to the top line, however, I still strongly feel the company should forgo the remodels and use the monies to buy back shares.

Yahoo (NASDAQ:YHOO): the shares have been on fire since the dismissal of Bartz and Third Point hedge fund manager Daniel Loeb's request to initiate sweeping changes to the Board. It could be argued that the Board is readying it for sale, which could easily translate into an offer carrying as much as a 25% premium.

Steelcase (NYSE:SCS): analysts have an overly optimistic average price target of $14 set in place; a more realistic target is closer to $10, but all bets are off the table, if the company becomes a private equity target.

Dean Foods (NYSE:DF): this one is selling for giveaway prices, considering its shares carry a ridiculous 12 forward multiple (based on 2011 earnings estimates of .69) and a multiple of 8 times 2012 estimates of 88 cents. Don’t be surprised if the company ends up putting its WhiteWave-Alpro segment up for sale, now that it is in such a growth mode (its earnings were up a solid 14% during its latest quarter).

Bottom line: When it comes to this group of dysfunctional stocks, fear has reached extremes, making bottom fishing a priority. In a year or so, the rewards could be so juicy , those reminiscing will proclaim how enjoyable it was to almost literally, “shoot fish in a barrel.."

Disclosure: I am long WINN, PBY, DF, IPSU, JBLU, LUB, SVU, SWY, YHOO.