Since my last update, nearly three months ago, the Basic Food Fund, or “BFF,” has risen 6.4% from $182.93 to $194.66 versus an 8.4% increase in the Dow. Its poor relative strength could be attributable to its lower beta status (lower beta stocks drop less in down markets but rise less in up markets) since its components are defensive in nature. Meltdowns in three securities didn’t help matters either, as both Luby's (LUB) and Winn-Dixie (WINN) received 20% haircuts, while CKE (CKR) took a 12% hit. Big winners in the index were The Great Atlantic and Pacific Tea Co. (GAP), soaring 66%, Smithfield Foods (SFD) rising 33%, Sara Lee (SLE) up 30% and Tyson (TSN) adding 12%.

• SLE: Everybody seems to love Sara Lee these days, as the shares have made another 52-week high. The pie and cake maker has seen a abundance of good news lately: (1) it beat 1st quarter earnings estimates and raised guidance, (2) Unilever (UL) bought part of its global body care and household products business for a better than expected $1.9 billion price tag (3) Both Procter & Gamble (PG) and SC Johnson have expressed interest in purchasing its air freshener business for as much as $700 million.
• IPSU: Imperial Sugar (IPSU) announced a joint partnership to build a new refinery at its Gramercy, Louisiana location. IPSU, Cargill and Sugar Growers and Refiners Inc. will each invest $30 million in assets to build a new state of the art refinery on a 207-acre parcel that IPSU is contributing to the new three way partnership. IPSU’s lone analyst also released bullish research notes and reiterated his $20 target price.
• BRID: The snack food company, Bridgford Foods (BRID) made a new 52-week high at $9.99 on news that the company was issuing a ten cent special dividend. Buyers are also banking on further earnings improvement when the company reports its 4th quarter results next month.
• SFD: Duetsche Securites upgraded its opinion on the pork producer from a hold to a buy, citing improving industry fundamentals, propelling the shares pennies from a new 52-week high.
• TSN: The company announced a new CEO, Donnie Smith (a longtime TSN executive) and is expected to report fourth quarter sales of $6.88 billion and earnings of 27 cents when it reports Monday. Two recent downgrades from JP Morgan and BB&T Capital Markets have kept the share price in check, but an earnings blowout could set the stage for an impressive rally.
• CAG: With a 3.6% dividend yield and a multiple of only 13 times 2010 earnings estimates of $1.69, it is no surprise why UBS recently raised its opinion on ConAgra (CAG) from a neutral to buy rating.
• WINN: The Grocer reported poor first quarter results prompting a beating in the share price. As a result, Activist Investor George Schultze, (his Schultze Asset Management firm owns 1.5%) wrote a letter to the Board requesting them to evaluate other alternatives (besides store remodels) to enhance shareholder value, such as a stock buyback or entire sale of the company. We will see how this develops.
• SWY: Safeway (SWY) reported solid third quarter earnings, beating the street by a penny. Although sales were down 7%, the company was still able to expand it gross profit margin by 78 basis points to 28.27% and buyback 23 million of its own shares.
• GAP: Buyout rumors are fueling this stock’s meteoric rise
• SVU: SUPERVALU (SVU) slashed its annual cash dividend from 70 cents to 35 cents, to help facilitate its decision to double the size of its Sav-A-lot division from 1200 stores to 2400 stores. An initial $75 million has been earmarked for the endeavor. About 75% of the stores are run through license agreements. Even though the dividend was cut by 50%, the yield is still a generous 4.6%.
• CKR: The burger chain has gotten into a price war with McDonalds and in my unbiased opinion (okay maybe it is just a little biased), is beating them badly. The company’s “Big Carl” is nearly twice the size of MCD’s Big Mac at a lower price, and its famous $6 burger has been slashed to $2.79. The burger chain is also offering a loyalty “rewards” card, giving customers even more incentive to come back. I guess if you can’t beat them, then “undercut them”, by giving the customer twice the product at less the cost. I just hope this strategy does not backfire .The stock is simply oversold and due for at least a “dead cat bounce”.
• DLM: Selling at one half book value, a forward multiple of 12 times 2010 earnings estimates and a 2% dividend yield to boost, Del Monte's (DLM) stock still appears cheap even after a substantial rise. Wall Street is apparently spooked due to its $1.5 billion debt load, and so am I.
• FLO: The bread maker, Flowers Foods (FLO), reported third quarter earnings of 34 cents, matching analyst expectations, but was short $14 million on the top line due to increased promotional activity. The company revised its fiscal year guidance from $1.43 to $1.40, creating a nice buying opportunity ,as the stock overreacted in a unjustified selling stampede. This one is headed back up to $26.
• KR: The newest addition to the index, stacks up to be a stellar performer. We shall see.

Last March, panic had set in and fear was making logical people illogical as they sold at will. Naysayers were talking about a total implosion as low as 1000 on the Dow. Sentiment was at an all-time bearish reading. There was blood in the street. Was Armageddon approaching?

Well, what a difference nine months makes since the capitulation on March 9th. Yes I actually sold 20% of my long positions that day to settle margin calls. Fear started to get the best of me as I contemplated selling everything I owned. Since that day, the Dow has rocketed up 61.8% (going from 6440 to 10,426) in about eight short months. If you calculate an APR for the Dow’s rise in that period, it computes to a staggering 92.7%. How many times have we had that kind of gain in the market? Zero up until now, but is this type of rally warranted? Probably not. As the economy has not improved that much and many companies pumped up their earnings by cutting costs and window dressing - not increasing sales. What happens when they have no more areas to cut? Earnings will have to be stoked the old fashioned way, and certainly not an easy task.

I admit I have been short too long on Priceline (PCLN), It feels like getting run over by a freight train each and every day the stock runs up and squeezes me that much more. I am ready to throw in the towel and cover, but I am afraid that it will be at the absolute top, and the minute I close out my position, the shares will quickly plummet. It seems that I am more worried about missing an opportunity to get my money back than losing even more money (sound familiar?)

At this point, it appears that I am grasping at straws to justify remaining short, but here are my bearish thoughts:

Anybody who had purchased BRID in the last seven years is ahead of the game, but just eight short months ago, all those who had acquired shares during the last twenty two years were under water when the shares hit an “insane” all time low of $2.53 in March. What a difference eight months makes - now the shares have nearly quadrupled along with the announcement of its first cash dividend in nearly six years. The moral of the story: patience sometimes pays off in a very big way.

Cash Dividend planned: BRID announced it intends to pay a special onetime ten cent cash dividend for shareholders of record on 12/8/09. Although this is less than the company’s previous annual 28 cent dividend, it is certainly a step in the right direction and a confidence builder. This action, in a sense, is management paying themselves a bonus for a job well done, as they will receive $770,000 of the $940,000 paid out, with the remainder being distributed among outside shareholders.

Investors have a short memory. They tend to follow the herd into the flavor of the month club and Amazon (AMZN) proves to be no exception. Some could argue its valuation is approaching bubble status when calculated at 52 times 2010 earnings estimates of $2.53 and 16 times book value. Looking deeper at this, the $2.53 earnings figure, which represents impressive growth of 35%, could be too low. If they earn $3.00 for a 60% improvement, the forward multiple falls to a more reasonable 40 times earnings; after all, stocks with higher growth are rewarded with higher multiples. This is a compelling argument to why Wall Street is hanging its hat on the premise that AMZN’s current estimates are indeed too low.

Potential dangers: The market seems to be putting its head in the sand regarding potential AMZN landmines. The threat of an impending internet sales tax, Walmart’s pledge to start an all out price war and the slew of competitors getting into the EBook reader business has swayed most analysts not to show caution. Everybody seems to be bullish on this one, and when market sentiment is this one-sided, tops are usually imminent.

Believe it or not, Baidu’s market cap of $15 billion is quickly approaching Yahoo’s stock value of $23 billion.

YHOO is currently being priced at the market at only 1.5 times that of BIDU yet, in an “apples to apples” comparison, blatant discrepancies stand out. YHOO is expected to generate $5 billion in sales and $700 million in earnings, while BIDU is forecasted to produce a top line of $900 million and earnings of $309 million (assumes a staggering 44% growth rate). The point is, YHOO’s sales are almost six times higher, while its earnings are triple that of BIDU. Therefore, it is reasonable to deduce that YHOO’s market cap should be three times that of BIDU, not one and half. There are inefficiencies between these two equities that should be exploited before the market eventually recognizes this abnormilty and prices them accordingly.

Despite the constant threat of legal issues facing Imperial, things are starting to look up for the largest publicly held US sugar producer. Imperial Sugar (IPSU) has completed the total rebuild of its Port Wentworth Refinery into a modern “state of the art” facility. The plant, which is expected to be fully operational by the end of the month will enable Imperial to refine and package sugar more safely and efficiently than the old plant.

The perfect storm: Sugar has recently climbed to historically high levels on the commodity markets .The spread between the cost of raw sugar and refined sugar has never been greater, enabling the company to hit the “sweet spot.” Although the company’s cost of raw sugar rises, the refined sugar segment rises at an even greater percentage, enabling them to significantly fatten up their gross profit margin potential. To make matters even better, the cost of natural gas has plummeted nearly 50% in the past four months (the company uses tremendous amounts in the refining process). The combination of low input costs, elevated selling prices and a higher efficiency plant sets up IPSU for a golden opportunity that probably comes around "once" every ten years.

Since WINN emerged from chapter 11 nearly three years ago, the company has shown some significant turnaround momentum. They have nearly generated $500 million of EBITDA earnings and remodeled over 170 of its stores. The striking thing about the remodel program is they have been able to achieve one third of their entire store base using nothing but their own cash flow (the company is debt free) yet shareholders have been left holding the bag. The truth is, the share price is near the same levels as the IPO price in Nov of 2006. All this progress and patience results in a big fat “zero return” for the original shareholders. What’s up with that?

Wall Street overreacted on first quarter results: First quarter results were bad, but they were not that bad. In fact, the company was able to still improve its gross profit margin from 27.9% to 28.2% despite a 2% loss in the top line. The company also saw its transaction counts stabilize, though its basket size shrunk due to deflationary headwinds and consumers' lack of overall confidence, especially due to continued pressure on the job market. WINN’s CEO expects the second half of fiscal 2010 will show deflation transform into moderate inflation, while employment and the overall economy will gain additional traction.

Expensive is a relative term. Those on the short side would say Google (GOOG) is expensive while those holding long positions would probably argue the contrary.

The fact is, GOOG has been on quite a run lately as analysts keep piling on with continual sweetening views. The trouble is, this could be a disservice to longs as these increased expectations increase the possibility of an eventual disappointment. The problem is the law of bigger numbers: each time GOOG reports it is dealing with a larger comparison number from the previous year’s period. This increase in the denominator makes growth increases more difficult.

If you listen close to Luby's (LUB) last quarter’s conference call, you will detect a faint glimpse of a possible turnaround in progress. Things are looking up:

1. Culinary contract sales are up 61% .
2. Cost of food dropped 10 basis points to 27.3% of sales.
3. Its “other expenses “ category fell 90 basis points to 22.6%.
4. Payroll costs dropped $1.2 million.
5. Management has a new marketing plan in effect.

On the negative side, the company’s SG&A costs spiked $200,000 to 8.6% of sales, something management must quickly get under control.

Well I have to admit, arguing with the market is a bad bet, especially when you are short one of the hottest search engines in the world, Baidu (BIDU). Being part of the last $100 rise in a BIDU short position has not been a pleasant experience, but being stubborn too long in the market is a recipe for disaster and I finally covered my position after the shares ran up another $40 just in the last two trading days.

I just couldn’t take the pain anymore and decided to throw in the towel. For the record, every time I cover, it seems the stock drops immediately after (anybody else have that problem?). Why is it climbing at such a climatic pace? I guess the fact that Google's (GOOG) CEO said the worst of the economy is behind us, had something to do with yesterday’s spike, or speculators on the sidelines are jumping in at any price in fear they might miss the boat as it swooshes by. But let’s face it, the bulk of the rise is probably attributable to shorts covering such as myself and momentum players trying push the limit. The fundamentals have been temporally replaced with the preoccupation of (or the perception of) robust earnings growth. Emotion and greed are running rampant again which is a precursor of disaster.

KR reported second quarter results that were stellar. Sales were up 3.5% (excluding fuel sales), earnings of 39 cents beat expectations by two cents and gross profit margin increased 59 basis points to 23.11%. In addition, debt was pared down $200 million and nearly 3 million shares were repurchased in the open market (there are still 425 million shares remaining for purchase.)

The trouble was, KR ratcheted down its fiscal 2009 guidance to the $1.90 to $2.00 range which spooked the Street -sending the shares down as much as 10%. I expect management is playing the conservative side on guidance and is certainly posturing a under promise-over deliver mentality.

Since the last time I wrote about SWY (over a year ago), the stock price has taken a huge turn for the worst, dropping more than 25% since I listed the attributes of buying it in Sept of 2008. I thought it was a relatively safe bet, but in hindsight, I was wrong, very wrong . Hopefully this time around I can make amends for the errors of my ways.

It is now a safer bet: The lower the price gets, the better the value becomes, and at this juncture I don’t see much downside left. The company is much leaner and stronger than it was last year and even a more compelling buy.

The way Wall Street has turned on SVU, you’d think the company had one foot on a banana peel and the other on a “slip and slide”. The Street has literally written it off as damaged goods because of its heavy debt load. It is evident that most don’t want to touch it with a ten foot pole. The good news is this kind of disdain usually presents opportunity for those investors with a “glass half full” mentality. The overall aversion to this equity makes it an attractive play to value seekers searching for a compelling contrarian position to open.

In the last six weeks, the Dow has risen 15% while Amazon (AMZN) has fallen about 10%, (that represents a staggering 2500 basis point difference) AMZN’s poor relative strength should be a concern to longs that further price erosion could be right around the corner.

What is driving the shares lower? Obviously, there are more sellers than buyers, but digging deeper, a few possible scenarios are:

Food stocks have been on a tear lately. Attributes such as more predictable earnings, juicy dividends, lower volatility and more reasonable price multiples are at the forefront of the sector’s recent success. They aren’t highflyers, glamorous or exciting like the tech sector, but they will help you sleep better at night.

The Basic Food Fund (BFF) certainly lagged the overall market the past five weeks rising a mere 9% from $167.73 to $182.93 compared to a more robust rally in the DJIA's 14% hike from 8332 to 9506, but it also won’t fall like a rock when the major averages correct through profit taking in the near future.

Priceline (PCLN) has been on a roll lately. The shares have more than doubled in the last six months alone and the analysts seem to be putting it in the “walk on water” class. However, the higher the shares climb, the more dangerous they become, as their potential fall becomes that much greater. It is safe to say the stock has gone up too far in too short of a time frame and is certainly prone to a correction through a wicked dose of profit taking.

Since reporting second quarter earnings, the shares have been on a tear, tacking on an impressive 20% gain from $130 to $155 just in the last nine sessions. Is it sustainable? Probably not, as the shares seem to be trading more on emotion and momentum than logic. If you add in the fact that some scared shorts are being forced to cover, then the upward force is even more compelling. The problem is, these types of rallies are usually not sustainable and this appears to be a classic case of sellers honing in on greater fools to dump their shares on them. Somebody will be left holding the bag when everybody decides to head for the exits at the same time. A minimum retracement of one half its recent $25 run-up since Aug 10th appears plausible.

The last time Baidu (BIDU) reached these levels, I pleaded my case for the need to short "at will" in a May 2008 article, titled “A Train Headed for Derailment” and yes, the train did skid off the tracks on its way down to the low $100’s. Well, here we go again, because approximately 15 months later, BIDU is coincidently presenting nearly the identical scenario.

Going short now is like shooting fish in a barrel because it is so overvalued and overhyped. The stock has more than tripled since the beginning of the year and now trades at a staggering 58 times 2009 earnings estimates. It has simply gone up too far in too short of a time frame and is quite vulnerable to a nasty selloff of more than 20%, especially with earnings expectations ratcheted up to such sky-high levels.

We have all heard it: food stocks are defensive in nature so that when things are dreadful, they shouldn’t get beat up as bad, and when things are good, they don’t participate with the same rigor on the upside as other stocks. But in this market, it just hasn’t worked out that way. In fact, when the market dived earlier in the year, food stocks actually had poorer relative strength than other sectors, but then when the market bounced back, the food sector’s relative strength was superior. The moral of the story: Sometimes you just have to throw out all the rules and trade by the “seat of your pants” utilizing your own gut instincts as your guide.

Disclosure: Long all equites included in the BFF Index.

Flowers Foods (FLO) is a national baked-goods operator with such brands as Nature’s Own, Sunbeam and Holsum. The company generates sales of nearly $2.5 billion a year and has been on a roll lately. It reported solid first quarter results generating a 19% sales gain, and a 5% increase in earnings. Although the company’s gross margin dropped from 48.3% to 46.8% (partially due to the startup costs associated with its new Kentucky bakery operations) it was still able to pare its SG&A costs from 37.2% to 36.4%. Its dividend is sound and management has continued to raise it steadily (seven consecutive years). In fact, the company just boosted its payout by 17%, helping it produce a juicy yield of 3.2%. The company’s meager debt of $272 million gives it a low 41% debt to equity ratio and at a forward earnings multiple of 15 times 2009 estimates of $1.43. Its value could be construed as compelling (its multiple falls below the average of its peer group).

Buyback in progress: The company initiated a stock repurchase program in 2002 of 16 million shares, raised it to 23 million in 2005 and finally to 30 million in 2008. It still has 8 million shares remaining for further purchases and when completed, will amount to 33% of its outstanding shares. The company is also rich in real estate holdings. Including its home offices, it owns all but one of the 39 production facilities it operates throughout the US.