'The Dirt Cheap Value Portfolio' - Insanity Times Ten

by: Mark Krieger

SuperValu swings 22% in one session, the wrong way.

Westport Fuel Systems rallies 500%.

Luby's make another new low.

JVA finds some legs.

I don't know what to say. I am simply flabbergasted. I have been a stock market guy, since a teenager and I have never seen anything like what I have experienced lately. Insanity seems to be dominating the pattern, especially for one like me, having a stubborn streak that makes me repeat the same actions over and over again, expecting different results.

Today was way freaky. My grocery company comes out with stellar earnings before the market open, its stock price promptly rises dramatically, only to get completely and utterly throttled by the close. A few days ago, another "DCVP" component and definite "M&A" target, falls to a new low, after its competitor is swallowed up in a private equity takeout, even at a significant premium. More examples include: an alternative energy play that rises five fold, in just six months and a stock market that keeps climbing into the stratosphere, without even a pause. Times are indeed wacky. As far as the "DCVP" is concerned, it increased a mere 4.4% from $24.28 to $25.36 (calculating SVU at its pre-split price) while the DJIA did significantly better, tacking on a generous 7.3% markup.

The esteemed list:

SuperValu (SVU): the grocery distributor released its second quarter result this morning before the market open. Sales exceeded expectations by $20 million while earnings came in 10 cents higher than what were expected. The company also reported their intent to purchase Associated Grocers of Florida for $180 million. This distributor should add $600 million in revenues as well as 1.5 million sf of real estate owned warehouse/distribution space. Initially the market hailed the results (even SA chimed in on the rally) putting it at the top of the NYSE % gainers list with a 10% markup, but within minutes, things got very ugly.

Not only did the shares give back all their gains, they actually ended up going 12% in the red, on over 5.5 million shares of volume. The shares made a new all time low, during the carnage that ensued.That represents more than a 22% negative spread between its high on the day and its close. What could have been revealed in the conference call to create such carnage and havoc? I put a email into the VP of Investor Relations, Steve Bloomquist, and he came back with a very quick response: "Seems like the market is reacting to the quicker TSA wind down period and possibly the magnitude of it (although we disclosed that in Q4)". I subsequently asked what a TSA wind down referred to, but was not answered. I didn't see anything alarming in the conference call transcript either, but I was so upset from the crash, that perhaps I overlooked it. If the Board was truly interested in carrying out its fiduciary obligation to its shareholders, it would surely, authorize at least a $30 million share buyback. That action would certainly boost market confidence in its cascading shares.

Today's wipe-out put the stock close to all time lows and a equivalent $2.43 pre-split price (the company enacted a 1 for 7 reverse stock split last month). The stock is now selling at a mere 1.31 times its 2018 EBITDA guidance of $495 million. The company also is real estate rich, owning 26 distribution centers as well as 30 store locations. It also recently acquired a $60 million distribution center near Chicago, from United Grocers out of bankruptcy.

Bridgford Foods (BRID): very little to discuss on this one. It has barely traded in the last three months. It trades so thinly, due to its tiny 1 million share float, that it has turned into a real Rip Van Winkle stock. Wake me up in five years.

Westport Fuel Systems (WPRT): this darling has increased more than five fold since its low of 82 cents, just a few months ago. In recent days, it almost gave back 25% from its highs in a logical, profit taking correction. Something I had been hoping it would do, so I could add to my position, without having to chase it to a new 52 week high. Since hitting $3.15, just yesterday- it has already climbed 15%. I guess I missed my window of opportunity. The shares are clearly making higher highs and higher lows (a very bullish phenomenon). What has prompted such a rise? The company was able to jettison a non core division for $75 million cash and Lake Street Capital Partners increased their price target a whopping 66%, from $3.00 to $5.00

In addition, the enterprise has revealed that they will begin shipping their showcase HPDI 2.0 components to OEM's, by the end of the calendar year and also expect to be EBITDA positive by the first quarter of 2018.

Luby's Inc. (LUB): fourth quarter results will be out on Nov 9th after the market close. Expect more bad news, especially with the effects of Hurricane Harvey incorporated in the equation. Look for the restaurant chain to generate sales of $94 million (a 5% drop) and net loss of .65 per share. This will include asset impairment charges of $3 million versus $1.5 million.

Although management never reported any information on Harvey's damage, at least one Fuddruckers was closed for repairs, and there appears to be 71 units still in operation. Luby's also closed down one Cafeteria location (from 89 to 88 units), closed one Cheeseburger in Paradise site (from 8 to 7) and their lone Bob Luby's Seafood Grill. Bright spots are few and between, but after scouring their third quarter results, at least they were able to generate $400,000 of frozen food sales from H-E-B Markets, as well as increase their culinary service sales by 20%, despite a slight loss in service locations. Bottom line on its fourth quarter? Luby's fourth quarter results will be poor, but Mr. Market already has that news and then some, baked into the current share price.

In other developments, I submitted a name change proposal for a vote, at the next annual shareholders meeting, but the company successfully was granted a "no action" letter from the SEC. I had thought that since the Fuddruckers name was more recognizable than the Luby's handle, a corporate name change to "Fuddruckers International", would make the company more visible, relevant and valuable. I have been doing my best attempting to be a viable shareholder activist, but being rebuked, time after time is discouraging.

In the meantime, the stock continues to make new 52 week lows. Will the carnage ever stop? I am seriously having my doubts. I even reached out to a hedge fund manager that owns Luby's in his portfolio. His response? "the stock is crazy cheap now, but the company needs to play some offense". He also said they should be more aggressive in their efforts to sell company Fuddrucker units, back to franchisees. I was elated to hear that Ruby Tuesday's just entered into an agreement, to be acquired by a private equity firm, for a 20% premium. On the other hand, I was utterly shocked that Luby's shares didn't rise too, in sympathy.

Coffee Holdings Company Inc. (JVA): I was tickled to death the stock finally rose north of the $4.00 milestone mark, and then all the way to $4.60 before profit taking, took some froth off. As a matter of fact, the shares punched above both their 50 day and 200 day moving average lines, in the process. The culprit of the upside move? The company once again announced a stock buyback plan ( their third, in three years). This latest one, authorizes up to $2 million to be purchased back in the open market- a real confidence booster, to say the least.

CEO Andy Gordon reiterated this stance, "we believe the public market is not reflecting the true value of our company, we have decided to initiate a share repurchase program whereby we may repurchase up to $2 million of our outstanding shares in the open market". I am hoping their new tea and China distribution efforts start to take hold in the current quarter-they could really move the needle.

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

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.