The Dirt Cheap Value Portfolio - 'Catch Me If You Can'

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Includes: JVA, LUB, WPRT
by: Mark Krieger
Summary

The "DCVP" motor is 44% higher in the 6-month period.

Bridgford Foods is the big winner with a 64% jump.

Westport Fuel Systems produces rare, blowout results.

Luby's earns the dubious "dunce cap" award.

I don't like to brag (well maybe a little bit), but the "DCVP" racked in a terrific six-month report card, by outperforming the overall market by 38-fold. While the DJIA barely chugged along, with a 1.58% gain, the DCVP generated a whopping 44% appreciation clip. Its index grew from $40.60 to $58.36, while the DJIA walked up from 25,538 to 25,942, thanks to gargantuan gains in Bridgford Foods (BRID) (64%), General Electric (GE) (47%), and Coffee Holding Company (33%). Rounding out the top four was Ford (NYSE:F) with a respectable 21% markup. The dubious distinction, for the only member in the red, goes to Luby's, falling 10%. It has been ushered to the corner of the room, while sheepishly wearing a well-deserved, dunce cap. The market's extreme disdain for this name qualifies it for the ultimate contrarian pick.

Portfolio members justifying commentary:

Luby's Inc. (LUB): The cafeteria chain delivered a mixed bag when issuing their second quarter results. Although gross profit margin grew 300 basis points from 7.70% to 10.70%, same-store sales fell a disappointing 3.3%. The company ended up earning 22 cents per share, due to gains on property sales of $12.7 million, partially offset by a $1.2 million asset impairment charge (future store closings). EBITDA improved by $2,459,000 to $47,400,000 during the quarter. Culinary service was the star segment of the group. Now operating 33 locations, its sales rose 28% from $5.9 million to $7.5 million. Its net profit margin really shined too, jumping from 3.6% to 11%.

Management's commentary: CEO Chris Pappas, mentioned that he was encouraged by the trend of sales, during the first part of its third quarter. He also said that their cost-cutting program was in full motion, and SG&A costs would have actually decreased $1.2 million if it wasn't for the cost to conduct its recent proxy fight with Bandera Partners. Pappas added that they have already closed 27 poor performing locations and have collected $35 million via the sales of those company-owned real estate locations. Luby's expects to collect an additional $10 million through the balance of the sites they expect to close.

Seeking Alpha author, Brecht Hanssens, dropped an interesting write-up on Luby's, before earnings were released and made some very relevant points. Hanssen's take? "If there is positive news about the asset sale program and reduction in debt, together with a stabilization of same-store traffic and/or sales, the stock could easily go higher towards the $2 mark".

I think Brecht could be on to something. After all, shareholder's equity of $115 million is nearly three times the company's market cap of $41 million. Something has to give. Hopefully, it will be Mr. Market, aggressively marking up the shares.

Re-franchising plans: Management stated they intend to sell all their company-operated Fuddruckers units, to franchise operators in the near term. All stores will be sold, except those operated in the Houston area. To illustrate their commitment, management declared they have already completed the sale of five San Antonio locations to a franchise.

It sounds like things are slowly beginning to change for the better, but the extreme toxicity, I have been accustomed to with this investment, is hard to shake. Being skeptical at this juncture seems reasonable.

Price target: $5.00

Coffee Holdings Company Inc. (JVA): The guys from Staten Island delivered a smooth, robust first quarter report. Sales jumped 7% from $22.1 million to $23.6 million. Gross profit margin grew 210 basis points from 17.20% to 19.30%. Net earnings were 6 cents versus 7 cents. The purveyor would have earned 12 cents if it wasn't for the unrealized loss associated with the company's commodity positions (coffee spot prices are hovering at a 15-year low of 91 cents/lb.). According to CEO's Andy Gordon's commentary, when those positions are eventually converted to physical coffee, they could result in profitable sales over the next several quarters.

JVA also saw its net cash position improve by $700,000 and its outstanding shares fall 3.4% to 5,569,344 shares. On a negative note, a 312 basis point increase to its SG&A expenses was sustained (15.50% of sales). Some of that gain is attributable to its new Steep & Brew operations. The rest of that increase could represent opportunity for further cost-cutting endeavors.

Second quarter results are due no later than June 15th. Stephen Anderson of the Maxim Group is modeling for quarterly earnings results of 7 cents on revenues of $24.4 million. This represents a 23% drop in earnings from 9 cents, but a 10% spike in revenues, from $22.20 million. Anderson has a $10 target price in effect. The analyst added, he is encouraged JVA has signed up two new private label customers that will begin receiving shipments, during the beginning of the third quarter. The sales contract could add at least $1.6 million to the top line, on an annual basis.

Recent 13F filings: Now that the stock has eclipsed the magic $5 threshold, new funds and institutions will now be eligible to purchase shares. This will add demand to the shares and could boost the share price. Both Acadian Asset Management LLC (acquired 51303 shares) and Alambic Investment Management LP (grabbed 121,873 shares) opened new positions in the company. Finally, Dimensional Fund Advisors LP doubled their stake to 115,455 shares.

More Seeking Alpha coverage: Last March, fellow Seeking Alpha contributor, David Logkasek wrote up a terrific analysis. He mentioned that although he is relatively bearish on the short-term price of coffee, he is much more upbeat on JVA's outlook and recommends buying on any weakness. I strongly concur with his stance.

Last but not least, JVA still sees coffee infused with CBD as a game changer but will be taking a "measured approach".

Price target: $14

Westport Fuel Systems (WPRT): The alternative fuel provider finally had a solid earnings report. Analyst first quarter expectations were literally blown out of the water. Sales came in 10% higher than anticipated, and net earnings were just a two cent loss compared to an anticipated five-cent loss. The fact these numbers were delivered was epic, considering the drag the company experienced from continuing legal expenses associated with its SEC investigation. Unfavorable foreign euro currency rates (7% depreciation) didn't help matters either. If it wasn't for these negatives, WPRT would have generated net positive earnings.

The company's flagship HPDI 2.0 line (with partner Volvo) showed considerable progress, helping its transportation segment produce a 15% sales increase. Adding more fuel to the fire is the scheduled HPDI 2.0 launch to the Chinese giant, Weichai Power, in the second half of calendar 2019.

In addition, the company's joint venture, Cummings-Westport celebrated a great quarter too. WPRT's portion of the profits amounted to more than a five-fold bottom line increase from $1.5 million to $8.7 million.

EBITDA rose from a $3.4 million loss to a $7.3 million gain. This nearly $11 million positive swing was mainly attributable to a 15% sales gain and an 18% increase in gross profit (from $14.6 million to $17.2 million). Further adding to the success was a 20% reduction in R&D expenses.

As recently as Thursday, the shares were trading as low as $1.60. Now, it is more than evident, Mr. Market was tickled pink. The normally fickle Mr. Market rewarded the shares with a 40% markup, on extremely heavy volume. Adding icing on top is the realization that the stock broke decidedly north of its stubborn 200-day moving average line of $2.10.

Analysts and institutions were giddy too. Lake Street analyst Robert Brown snuggled up to the name by upgrading from a hold to a buy rating. He set a $5 target price. Brown especially liked the facts that the European Union will be mandating a 30% reduction on CO2 emissions by the year 2030, and WPRT's HPDI engine launches were tracking well. Pembroke Management LTD recently stockpiled another 1 million shares, raising their total holdings to 5.84 million shares - morphing into a 4.4% stake.

Are the shares getting too frothy? That might be just the case. It is more than evident they have reached a firmly overbought condition. As a consequence, it might be prudent to buy, only on pullbacks. Chasing rising stocks is simply too risky for my blood. Wait for a profit-taking correction to occur.

Price target: $8

Conclusion: The "DCVP" definitely went to Pluto on this last go around, and it could easily double again by year's end. Catch it if you can.

Disclosure: I am/we are long JVA,WPRT,BRID,GE,F, LUB. 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.