da-kuk
Since my last update on May 9th, 2022, the Dow Jones Industrial Average has gained 2% from 32,899 to 33,546. The “DCVP” faired far worse, experiencing a heinous 6.40% markdown. The index dipped from $115.81 to $108.37, thanks to double digit losses in Westport Fuel Systems (29% drop) and Coffee Holdings Company (26% dent), partially offset by a stellar 18% increase in General Electrics. The only other winner in the bunch was Ford, tacking on a 7% markup. The other losers were BRID and FARM, with respective losses of 15% and 4%.
As I have stressed in prior articles, all investors should have an insurance policy/hedge in place to protect themselves from market downturns. Although I took a beating on The Dirt Cheap Value Portfolio (“DCVP”), it has been partially mitigated/offset by my short position in QQQ and my long position in QID. QID is good for those, who do not wish to trade on margin, as it is an inverse exchange-traded fund (“ETF”).
I love sales and I’m not afraid to use them as buying opportunities, as an averaging down method. One thing I would like to make clear: I never try and catch a falling knife. Trying to pick a bottom is a fool’s game. It is better to wait until the shares you are tracking start to rally at least 10% above their 52-week lows, before adding. You definitely have to pay more that way, but “the trend is your friend.” It is well worth paying for.
The esteemed list
Westport Fuel Systems (WPRT): Just two weeks ago, WPRT released their third quarter results. Sales were sluggish due to the war in Ukraine, supply chain issues, and high natural gas prices. The top line fell 4% to $71.20 million (sales would have actually increased 10% if it wasn’t for the weakening of the Euro against the U.S. dollar).
On the plus side, the company’s gross profit margin rose 13% from 16% to 18% and still has a decent cash hoard of $87 million. On the negative side, management was unable to control their operating expenses as they expanded a troubling 580 basis points from 25.30% of sales to 31.10% of sales. Perhaps all salaried personnel should be subject to a 10% pay cut until the bleeding stops.
Last point, as a shareholder, I would recommend the Board consider a reverse stock split. It would take the shares out of penny stock status, and put it back with the big boys. A one for twenty reverse split would create a $16 stock price with 6.8 million shares outstanding. This action would cure their deficiency notice with the Nasdaq.
Target price: $2
Ford Motor Company (F): in just eight months this stock saw more than 50% of its market cap evaporate. It was obvious the shares had simply gone up too far, too fast when they nearly hit the $26 mark, last January. The market often acts as a pendulum. Moving way too far in both directions. After the current rout, the shares had gone from an overbought condition to an extreme oversold scenario. After rallying 30% from its late September low of $11, the stock is on the move again, supplemented by its respectable dividend yield of 4.32% (based on an annual cash payout of 40 cents per share).
Target price: $16
General Electric (GE): this one had been obliterated but has already rallied over 40% from its 52 week low of $62 on Sept 30th. The stock simply became severely oversold by dropping too far, in too short of a time. Obviously, bargain hunters and shorts covering to book profits acted as the calvary for the quick and drastic recovery.
I like the fact that these guys recently set a $3 billion stock buyback program in effect. This is enough to retire 3.50% of its current shares outstanding. The cash dividend (although small at 32 cents) is a bonus too, as it makes the company even more legitimate. Analysts expect the company’s earnings to grow an exceptional 68% from $2.88 in 2022 to $4.84 in 2023. That puts the shares at very reasonable forward multiple of just 16.
Target price: $100
Bridgford Foods (BRID): Isn’t real estate such a beautiful thing? In addition, BRID owns the real estate and structures on six food processing plants. (Statesville, North Carolina– Anaheim, California— one plant in Chicago, Illinois and two facilities in Dallas Texas). In all, I think their real estate holdings alone, are worth north of $250 million. Compare that to their current market cap of $119 million. What will management do to monetize those hidden assets? If I was them, I would take the company private. Could Bridgford Foods go private? The chances are good. By doing so, BRID could cut its administrative costs and eliminate the burdens imposed on public companies. No more SEC filings, no need to be transparent, no annoying shareholders to deal with. In addition, trade secrets could be easier to shroud. Why is this probable? Because the Bridgford family already controls 80.70% of the 9,076,832 shares outstanding. They are also firmly embedded in leadership with over 15 family members (now 5th generation emerging) holding top positions.
That insinuates only 1,750,388 shares would have to be acquired from outside shareholders. If you place a typical 50% tender offer premium on the shares, that equates to a mere $35 million necessary to pay off the remaining shareholders. A more than realistic undertaking to say the least. A private company once again? Stranger things have happened.
Third quarter results were released on Aug 26th: (1) sales rose 5.30% from $56.5 million to $59.51 m(2) operating earnings rose from a negative $1.83 million to a positive $1.80 million (a $3.63 million positive swing) (3) gross profit margin rose 730 basis points from 21.20% to 28.50% (4) SG&A costs rose 50 basis points from 25% to 25.50% (5) earnings jumped from a loss of 16 cents to $4.55 (6) Long term debt decreased about 90% from $36 million to $4.16 million (7) cash increased by $20.10 million (8) shareholder’s equity rose 57% from $75 million to $117 million (9) Wal-Mart sales dropped 740 basis points from 36.70% to 29.40% while Dollar General picked up 310 basis points from 16.10% of Bridgford’s total sales to 19.20%
Looking at a sequential comparison between the company’s third quarter and second quarter. Even though sales were essentially flat, the company’s third quarter operating earnings rose 19.70% from $1,504,000 to $1,801,000, thanks to a 70-basis point uptick in gross profit margin from 27.80% to 28.50%. SG&A expenses were $15,220,000 versus $15,178,000. Interest expense fell 17.90% from $318,000 to $261,000
Target price: $20
Coffee Holding Co., Inc. (JVA): the shares made a new 52-week low of $2.00 a few weeks ago despite announcing it was being acquired in a stock transaction next year. The implied price is $5.50, but obviously the Street can see right through the charade, or the stock would have been obliterated on the news. The valuation is based solely hypothetical value of a logistics company that’s been in business just two years with a mere 80 employees and scarce assets. JVA shareholders are supposed to receive roughly 4.79% of a $650 million company. The problem is, Delta could be worth $50 million if their 2022 earnings suffer. I simply can’t believe the CEO would even entertain such an insane idea. It is simply wrong for shareholders. It is even more ludicrous when you consider he termed the company “sorely undervalued” when the stock was trading at double current levels. I have already been forced to sell over 1/2 my holdings due to forced margin calls. The reason I don’t sell the rest? I have lost so much already, why even bother?
I have basically resigned myself with going down with the ship. The lesson I have learned out of this debacle is don’t get too emotional about a stock and the utter importance of cutting your losses short. One other takeaway? Disappointment on steroids.
Target price: $3.50
Farmer Bros. Co. (FARM): First quarter earnings were just released, and super investor Tim Stabosz wasn’t impressed. His words? “Completely unacceptable. I suppose the good news is that the activists are going to be a witness, and participant, on the board, to proper governance…and proper governance involves a market check on what sale or break up of the company will bring. My guess is $8-10. And management seems honorable enough to go along/concur that examination of that process is necessary and appropriate. But the fact that we are at this place is only a reflection that they have fallen on their faces, operationally”.
What did I see good out of the report? A little, but not a lot. Sales rose 12% to $121,380,000 and Selling/G&A costs fell 350 basis points as a percentage of sales from 34.80% to 31.30%. What I did not like, was the complete collapse in profit margin from 29% to 22% and the fact that the Board has increased the shares outstanding by 5.40% from 17,969,694 shares to 18,948,453. This was accomplished through liberal employee stock grants. Stock dilution is one of my biggest pet peeves.
Target price: $8
Summary
Expect more downside in the overall market ahead. It is worth noting that 50% of DCVP’s are food producers. These are notoriously defensive non-cyclical stocks, which usually attract flight of quality funds, during market panics. They typically exhibit high relative strength, during market downturns.
Interestingly enough, all three food companies held in the portfolio, have all suffered. A shameful performance is an understatement. Am I frustrated, demoralized, and void of all confidence? You bet I am. A Mea culpa for the ages.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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