Dirt Cheap Value Portfolio: Reverse Stock Splits Can Be Good

by: Mark Krieger

I’ll admit, sometimes the allure of a cheap stock gets the best of me, but there are usually valid reasons why a stock trade where it does, and finding the disconnect between market valuation and fundamentals is not easy. The market is supposed to be efficient, but when it isn’t, opportunity can be uncovered. You just have to rely on some effective detective work to do so.

The “DCVP” displayed an absolutely horrid past week by dropping at a 40% worst clip than the DJIA’s fall of 5% (it shed 7% from $92.40 to $86.20). Are these seemingly giveaway stocks within it, simply a bull trap, or is the rampant fear associated with the overall market taking these down without merit? Unfortunately, only time will provide the ultimate answer to this question, explaining why many instances the most patient investors appear to reap the biggest awards. In the meantime, the biggest loser of the “DCVP" happened to be Winn Dixie (NASDAQ:WINN), taking a nasty 17% drubbing, while its strongest component Safeway (NYSE:SWY) managed a modest 1.4% slide on the week.

The latest on the components:

Dean Foods (NYSE:DF): The milk producer needs to see more insiders buying to validate its uptrend. The last insider purchase was nearly 10 months ago, when Outside Director Wayne Mailloux bought 5,000 shares at $8.31. Author view: Hold.

Winn-Dixie (WINN): The shares traded within 6 cents of an all time low of $5.10 on Friday (11/25) only to modestly rebound to the $5.22 mark. At this bottom price of only 1.75 times cash on hand, serious consideration of enacting a stock buyback, a reverse stock split or both, should be paramount. Reverse stock splits make sense for low priced stocks, as their new higher prices make them more marginable (many brokers won’t loan on sub $5 stocks) and more desirable to institutions (some institutions are prohibited from buying sub $5 securities).

What would a “one for ten” reverse stock split do to WINN? Not a single solitary thing, except instead of having a $5 stock with 56 million shares outstanding, shareholders would end up with a $50 stock with 5.6 million shares outstanding. In fact, since PCLN initiated a “one for six” reverse stock split in June of 2003, its shares have risen over 20 fold, validating the concept. Author view: Set stop/sell order at the $4.85 mark.

Safeway (SWY): Looking cheap at only 10 times 2012 estimates and sporting a 3% dividend, it is no wonder why SWY performed so well relative to the overall market’s carnage the past five days. Author View: Buy.

Imperial Sugar (NASDAQ:IPSU): You have to wonder whether management’s interests are aligned with shareholders when analyzing this company. It is apparent that a lack of news out of corporate is indeed troubling. It would be nice to see more frequent updates, with emphasis on color and transparency, which would aid in clarifying the company’s floundering fundamentals. A reverse stock splilt should also be considered. Author view: Set stop/sell order at the $4.75 level.

SuperValu (NYSE:SVU): I am not going to lie, a price earnings multiple of six, and a dividend yield of 5% is extremely difficult to pass up. If it wasn’t for its heavy debt load, this stock would be trading at twice the amount. Author View: Hold.

JetBlue Airways (NASDAQ:JBLU): Airlines are notorious for losing money. You would think by now these guys would have learned from their mistakes, but apparently they have not, as they seem to repeat the same things over and over again, expecting different results. It just doesn’t happen that way. JBLU should end the insanity by radically changing things and putting itself up for sale. A reverse stock split is a "no brainer." Author View: Sell.

Pep Boys: The auto parts purveyor is slated to release third quarter earnings Monday, December 5. Analysts are anticipating PBY will to deliver an 18% increase in earnings from 11 cents to 13 cents. Sales are expected to grow 5% from $496 million to $523 million. Look for PBY to surpass these estimates as it reports earnings of 15 cents on sales of $528 million, thanks to growth in its service centers and effective cost cutting measures. Author view: Buy.

Yahoo (NASDAQ:YHOO): News that MSFT signed a non disclosure agreement in order to obtain a better look at the company should be “music” to investor ears. MSFT wouldn’t go to all this trouble just to “kick the tires," there is real interest here. Author view: Buy.

Luby’s (NYSE:LUB): This is another company that should seriously consider a reverse stock split for obvious reasons. If not, then the company should hire an investment banker to explore alternatives to enhance shareholder value. Author View: Buy.

Steelcase (NYSE:SCS): At its current price, the shares are still 38% above their March 2009 lows, so some meaningful downside still exists. To top that off, debt remains an issue with this company. During the past year, it has gone the wrong way, increasing $1.2 million to $291.3 million. I realize the increase is minuscule on a percentage basis, but the addition still ends up sending the wrong message. Author view: Sell.

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