The Dirt Cheap Value Portfolio - 'Let's Put On Our Activist Hats'

by: Mark Krieger


An overabundance of low hanging fruit is lingering.

Bridgford Foods reports stellar fourth quarter.

M&A activity is highly probable on 60% of components.

Imminent catalysts (earnings reports) could bring us to the promise land.

Prospecting in the junkyard can be scary, but reap fabulous rewards.

I have always been a follower of Peter Lynch, a value investor who based his principals on the grand daddy of them all, Benjamin Graham. I had stints with Joseph Granville too. His, "On Balance Volume" (OBV) theory seemed to reveal clues of accumulation. Now I have transitioned into the Walter Schloss arena. I also love to follow "smart money" like Carl Icahn, Mario Gabelli, Whitney Tilson, George Schultze, and last, but not least, David Einhorn.

Although I have high regard for these gurus, sometimes I fall off track. Lately, the DCVP more resembles a "crash and burn" calamity, than a bonifide investment (forced margin calls and sleepless nights are not helping either). In the future, instead of trying to reinvent the wheel, I am going to try and ride the coattails of these great investment minds more.

Being stubborn, emotional and undisciplined is not beneficial either, especially when you finally revert to "hope and prayer" (the proverbial "writing on the wall" that your goose is already cooked). I still moderately proclaim that the glass is still half full (although some would ask, with what?) and that the market is about living to fight another day. I am prepared to fight tooth and nail, despite my obvious deficiencies.

It has been more than two months since my last update, and the numbers are worrying. Although the Dow touched the 20,000 mark, rising over 4% (if you round up), the "DCVP" actually lost almost 3%, falling from $26.90 to $26.19. It is obvious that the portfolio exhibited poor relative strength during the period. The good news is the portfolio is so oversold, it is bound for a nice bounce. Buying the dip certainly is logical at this juncture.

I am not going to lay down and get steamrolled. I intend to take matters into my own hands by putting on my big boy pants and finding the largest activist hat in the closet. If the top echelon does not put shareholder enhancement at the top of the priority list, then I will hold them accountable. I will be a thorn in their side until they decide to throw me a bone, so I can ride off into the sunset and leave them alone. They would like that, as they are surely sick and tired of my pestering.

What do I have up my sleeve? I know a couple of investment bankers, and I might pull out the "can you do me a favor" card. I can also send a letter to the respective Boards of Directors, voicing my concerns, and have that letter highlighted by including it as a press release with one of the wire services. Another method is offering shareholder proposals, via the 14a-8 format to vote on at the Annual Meetings. In addition, soliciting research coverage (60% of the portfolio has none). Running an ad in a financial publication, such as Investor's Daily (listing the stock's value attributes) can also prove fruitful.

The esteemed list:

Luby's (NYSE:LUB): These guys have been quiet as a mouse the last few months, only generating a single press release revealing that Travel Centers of America has opened up their third Fuddrucker's location. They will be releasing their first-quarter earnings by the end of the month. On Feb. 3rd, the restaurant chain will be hosting their Annual Meeting, but I have a feeling management will be on the sheepish, embarrassed side, especially with nothing of substance to illuminate.

As a matter of fact, page 19 of this year's 10-K (fiscal 2016) says it all. It is a five-year comparison graph between Luby's and the S&P 500 index, and S&P 500 restaurant index (peer group). It assumes you started with a $100 investment in all three entities. Today, your S&P investment would be worth $198.40, while the restaurant index would tally in, slightly less, at $183.82. The drum roll please. An investment in Luby's would now be worth $98.90! Ouch, the other entities nearly doubled while we saw our investment go backwards.

Management is still putting on the happy face, proclaiming the following in their annual shareholders letter: "we believe our company and brand position is in better operational condition than at the end of the close of the prior fiscal year, and is well positioned for sustainable growth and enhanced shareholder value". For the last 15 years management has been regurgitating the same thing, let's hope this time is different.

First-quarter results will not be spectacular (they never are). Although sales will fall about 2% from $121 million to $118 million, earnings should transition into the green, from a 6 cent loss to earnings of 2 cents. Lower commodity and SG&A costs will be the catalysts for the improvement.

Bridgford Foods (NASDAQ:BRID): They just released their 10-K, and it was solid. Sales rose 8% on the year to $140 million, while earnings before taxes jumped 33% to $10.8 million. The snack-maker's cash hoard also swelled, jumping 20% to $7 million. Next month the company is expected to gain formal approval from the City of Chicago for their residential/commercial development to be situated at their current beef jerky plant. This epic project could be a real game changer. In the meantime, the company is exploring new sites for their meat processing plant.

Coffee Holding Co., Inc. (NASDAQ:JVA): Fourth-quarter results are due out in a few weeks, and we could see some improvement based on the new business picked up from Smart and Final, Food Lion and Wal-Mart (NYSE:WMT). In addition, the CEO is very encouraged about their recent Sonofresco acquisition, indicating it has the best chance to move the needle among all their new sales growth initiatives. When they presented at the LD Micro Conference last month, management revealed they were working on some new Cafe Caribe brand customers, including K-Mart, Smart and Final (they already handle their private labeling) and Acme Markets. The coffee producer also mentioned they were adding a cold brew line. I was asked not to include a link to the presentation since these sales contracts have not been finalized.

Regarding the company's upcoming fourth-quarter results, I estimate they will generate sales of $18 million, and a bottom line of 16 cents. This improvement is based on favorable commodity costs and more effective cost controls. Sales to their largest customer, Keurig Green Mountain (NASDAQ:GMCR), will fall to about $3 million.

SuperValu (NYSE:SVU): A poor third-quarter earnings report sent investors running for the exits, and the shares took a big hit as a consequence. The stock is way oversold, and just 20 cents away from breaking below its 52-week low.

Westport Fuel Systems (NASDAQ:WPRT): I am not going to lie, this vile and highly toxic stock has tormented me for years, losing 90% of my investment as a consequence. The company has promised to disseminate calendar year 2017 guidance, but that still hasn't happened. I have to admit the press release that former Fuel Systems CEO has resigned from the Board was interesting. In addition, the news piece regarding methane emissions confirms that management still has some regard for the share price. In conclusion, I no longer feel like an investor when it comes to this equity, but a speculator.

In summary: Prospecting in the junkyard can be risky, but with risk comes great reward. I am still confident that both Luby's and Coffee Holding's days are numbered as public companies. Bridgford Foods is too, as the company is essentially already private, with the Bridgford family owning 80% of the shares. Merger and acquisition circumstances appear most imminent for JVA and LUB. Both companies represent an overabundance of low hanging fruit just itching to be plucked off. The rationale? (1) each are run by brothers with massive skin in the game; (2) their respective stocks hover near multi-year lows and sell below book value; and (3) they both possess solid balance sheets.

The problem is, the market is not recognizing these value characteristics and is severely penalizing both investments at the end of the day. That's why it is my obligation to help the market see otherwise. If you want something done right, you have to do it yourself. I have to protect my investment and do so relentlessly. How about you? Are you ready to put your activist hat on too?

Disclosure: I am/we are long LUB,JVA,WPRT,BRID AND SVU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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