The Dirt Cheap Value Portfolio: Exhibiting High Relative Strength

by: Mark Krieger


Activist investor Becker Drapkin Management plans to take action to rectify Fuel Systems Solutions' undervaluation, which could ignite M&A activity.

Famed value investor Mario Gabelli continues his buying spree in Pep Boys.

Jet Blue Airways skyrockets 17% and garners another upgrade.

The "DCVP" continued to scratch and claw its way higher the past five weeks, rising 3% from $46.22 to $47.44, despite the DJIA remaining flat. A 3% gain might not seem like a lot, but when annualized, it produces a jaw dropping 36% APR. In addition, its high relative strength provides a nice level of comfort, in a anxiety ridden market.

The star of the group was Jet Blue Airways (NASDAQ:JBLU), soaring 17.6%, while the clear stinker of the bunch was Fuel Systems Solutions (NASDAQ:FSYS), taking an ominous 9% beating. Pep Boys (NYSE:PBY-OLD) was the next best performer, racking up a 4% gain, while both Bridgford Foods (NASDAQ:BRID) and Luby's (NYSE:LUB) remained largely unchanged.

The esteemed list updated:

Fuel Systems Solutions: Reported disappointing third quarter results and reduced sales guidance and the analysts chimed in with their disapproval. Northland Securities chopped its price target by 33% from $15 to $10, while Canaccord Genuity was more gentle, slicing its target just 10%, from $11 to $10. The good news is that activist investor Becker Drapkin Management LP must have clearly seen value in the name, as they just reported in a 13d filing, that they have become FSYS's largest outside investor, by amassing a 6.4% stake.

Becker Drapkin indicated that FSYS was undervalued and represented an attractive investment opportunity. The investment firm went on to say, it may make proposals to management regarding changes to strategy, capitalization, ownership structure and operations. In addition, it may seek Board representation in its effort to rectify the stock's undervaluation. This activism could spawn M&A activity.

It is a bit ironic that Becker Drapkin is not the only activist investor currently associated with FSYS. As a matter of fact, this writer has also dropped his hat into the activist ring, by submitting a proposal for vote at next year's annual shareholder's meeting. My recommendation is for the company to execute a stock buyback plan. Management has already responded to my proposal, by indicating that they will consider it, but have the right to exclude it on "substantive grounds". We will see how that plays out. Price target action: raise from $13 to $14.

Luby's Inc.: The company opened up its 4th dual concept (both a Luby's and a Fuddruckers on opposite sides of the same building) on August 14th. This format on average, has been generating 20% higher sales than traditional locations, so these openings could eventually move the needle. In addition, another bullish Seeking Alpha article authored by John DiStanislao has been published and some big institutional buyers seem to be taking notice as both Sunrise Partners and Deutsche Bank bought 85,903 shares and 88,105 shares respectively. Grace and White increased their position by nearly 50% with their 118,477 share purchase, bringing their ownership total to a respectable 325,000 shares.

The company is expected to earn 2 cents on sales of $100 million when they report their 4th quarter results in November. This could be too tepid - look for a surprise beat of $1 million on the top line and 4 cents recorded on the bottom line. It is interesting to note that even though LUB shares are down 30% in the last 12 months, while AAPL shares are up 40%, Luby's shares extract the same 4 star Motley Fool Caps rating of "attractive." Price target action: raise from $7.50 to $8.00.

Bridgford Foods: The snack food maker is slated to file its 10Q for its third quarter results by the end of the week (it does not issue press releases for earnings). The company has been hurt by recent jumps in commodity prices - especially the cost of beef and flour, so its latest results will likely not be profitable. On the other hand, they could produce as much as 6% rise in sales, to $31 million (thanks to increased sales momentum from Wal-Mart) which could give this very oversold stock, as much as a 15% lift. Price target action: raise from $9.75 to $10.00.

Jet Blue Airways: This one can do no wrong, and the only word that adequately describes the current state of its stock is "soar." Cowen just upgraded its opinion from market perform to outperform and sweetened its price target a staggering 50% from $10 to $15. The investment firm rationalizes that possible management changes will allow the carrier to increase utilization of its A320 aircrafts and its ability to add fee based fee-based revenue. In addition, falling fuel prices should provide a nice bonus. Price target action: raise from $14 to $15.

Pep Boys: The auto service and parts provider is scheduled to report its second quarter results on Sept. 9th before the market open. The company is forecasted to chalk up a modest 1% rise in sales to $534 million. Earnings are expected to drop one penny from 18 cents to 17 cents. I have a feeling these expectations are too modest, based on the way Mario Gabelli has been gobbling up the shares recently. That being said, the auto parts purveyor is way past due for a solid beat. In his latest 13F filing (covering April 1 to through June 30) Gabelli's Gamco fund purchased another 507,000 shares, and now owns 6.89 million shares. Additional big buyers in the quarter included Babson Capital Management acquiring 210,838 shares, and Copper Creek Partners Management, scooping up 273,000 shares.

Price target action: raise from $12 to $13.

Disclosure: The author is long FSYS, BRID, LUB, JBLU, PBY.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.