Value Portfolio Produces a Horrendous Report Card

by: Mark Krieger

I touted a dozen so called "value" stocks that came across my radar screen last month that I characterized as "low hanging fruit" which should quickly be picked before someone else strips the tree, thus eliminating a grand opportunity. Unfortunately, I would have been far better off letting this fruit simply rot on the trees, as this group of equities got clobbered beyond reason.

What on earth happened? I have no clue, other than they got caught up in a wave of massive selling, as a avalanche of customer redemption requests forced mutual and hedge funds into forced and relentless selling.

Dow decline versus "value" stocks: In the past five weeks, the DJIA experienced about a 15% decline from approximately 9950 to 8500. My dozen value stocks fared much worst, as only two members of the portfolio actually managed a gain (both IPSU and JBLU saw price appreciation), two members were flat (WINN and SWY) and the remaining eight equities averaged a 40% bloodletting. This rate of price depreciation represents almost three times the carnage of the overall market in the same period.

This is especially mind-boggling, because this group of so called defensive stocks, are all within vital industry sectors. In normal times, these stocks would be prone to attract buyers in "flight to safety" maneuvering. The average beta on these twelve stocks is 1.1, meaning they should trade at a volatility of 1.1 times the overall market (1.1 times 15% DJIA loss =17%) so at the most, this portfolio should have been down about 17%, making this "disconnect" very perplexing.

Winners: IPSU was up nearly 20%, as this debt free sugar processor could be an acquisition target of Cargill. JBLU was also up 20%, as its largest cost component, jet fuel, has fallen off the charts, dropping nearly 66% in the last four months. Low fuel costs coupled with industry capacity reductions is a recipe for further appreciation, however, the perception of a slowing economy, softening the demand for flying, has hampered much of the stock's ability to go through the roof.

Losers: Tyson Foods (NYSE:TSN), the king of meat processors, wins the prize as the biggest loser, falling 58% while its rival Smithfield Foods (NYSE:SFD), the largest pork producer, took a close second with a 42% drubbing. Grocery retailing giants, Supervalu (NYSE:SVU) and Great Atlantic and Pacific Tea Co. (GAP) suffered similar fates, each seeing about 45% of their market caps erased. Auto parts retailer Pep Boys (NYSE:PBY) saw a 40% hammering, despite three analyst upgrades (go figure) while hamburger purveyor CKE Restaurants (CKR) got a 34% drubbing. The largest world wide office furniture manufacturer, Steelcase (NYSE:SCS), took a 34% hit, and last but not least, snack food processor Bridgford Foods (NASDAQ:BRID) saw its shares sliced 20%.

Dividend yield boost: About 40% of the stocks within the portfolio do not pay cash dividends (GAP, SFD, JBLU, WINN and BRID). Now that the dividend paying stocks within the portfolio, have fallen so much further, their respective dividend yields have been boosted accordingly. The largest dividend yield is produced by Steelcase, now at a juicy 8.6%. Pep Boys follows at 6.8%, while SVU pays 5.5% yield. The balance of the portfolio averages about a 2% dividend return.

Price to Book value: This handy gauge is easily calculated by dividing the share price by book value. It helps the investor compare the share price to the value of the company's assets. Eleven of the twelve companies sell at or below their book value or shareholder's equity. Keep in mind that goodwill is included in book value, and this accounting entry should be subtracted out to figure tangible book value, a more relevant value gauge. SFD sells at the greatest discount to book, at a price to sales ratio of .29. Other deep discounted stocks in this category include: BRID at .33, TSN at .36, PBY and SVU at .43 and GAP at .57.

Price to sales ratios: This valuable tool is calculated by dividing the share price by annual sales per share. It gives the potential investor the ability to compare a company's share price against the amount of sales each share generates. The winner of this category is GAP selling at a tiny .03 of sales, followed by SVU at .06 of sales. The next ten are TSN: .07, SFD: .08, PBY: .10, WINN: .11, SWY: .22, CKR: .24, IPSU: .26, SCS: .27, BRID: .33 and JBLU: with a .47 price to sales ratio.

Forward PEs: Let's face it, Wall Street does not care about what has already happened (history) but what will happen, so it is important to look at 2009 earnings estimates when calculating relevant forward looking PE ratios. The winner of this category is SVU selling at an astounding 4 times 2009 earnings estimates. Others include SCS: 7, CKR and JBLU: 8, SWY: 9, TSN: 11, SFD: 14. IPSU: 36, PBY: 60, WINN: 77. BRID and GAP were not included in this category, as BRID has no analyst coverage, and GAP is expected to post a loss in 2009.

Debt to equity ratios: IPSU, BRID and WINN are all debt free, so a debt to equity calculation is not viable. The ratio is calculated simply by taking a company's debt, divided by its book value. It allows you to compare how much debt a company has in relation to its equity. SCS has the best ratio of .29, followed by TSN: .57, PBY: .70, SWY: .85, SFD: 1.28, SVU: 1.47, CKR: 2.0, GAP: 2.40 and JBLU at 2.44.

Two new additions: Sara Lee (SLE) and Con Agra (NYSE:CAG) should also be added to the portfolio. They both have meaty dividend yields over 4%, low forward PEs of 11 and debt to equity readings averaging below 1.0. Each of these companies also have aggressive stock repurchasing plans in effect, indicating management is confident its shares represent compelling value at these depressed levels.

Throwing good money after bad: Should you buy now, or if you already have positions, should you buy more to price average down? It's a scary proposition to buy when the trend is this negative, but since rationality and reason have exited this market, it creates the perfect time to exploit this extreme situation. Sooner rather than later, these stocks will see a quick and violent recovery once this insanity abates and cooler heads prevail. Warren Buffett's philosophy is simple and a bit trite, but it's worth repeating: "Be greedy when others are fearful and fearful when others are greedy".

This entire portfolio has lost nearly one half its value in just five weeks. If I liked the shares at twice their prices, I absolutely love them now after their recent half off sale! Wall Street seems to be the only retailer on the planet where a half off sale fails to produce customers. I guess the herd mentality is to buy high and try and sell higher. This approach seldom produces success, as holders tend to get too greedy to take profits, only to see their profits turn to losses.

My philosophy: to buy at extreme lows and then sell higher. Saying this portfolio qualifies for this approach is certainly an understatement. Hopefully, this portfolio's next report card will see a vast improvement, as you can only go up when you have a nothing but a sea of "F's" comprising your baseline.