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The Dirt Cheap Value Portfolio: Extreme Hate Selling Translates Into Opportunity
Crashing a whopping 7% versus the Dow’s 2% loss, is downright scary. Luby’s extreme spike in volume is intriguing. Institutional 13F purchases are encouraging! FSYS wins contract to supply natural gas refueling stations in Italy. 80% of the portfolio are prime takeover candidates. Being a contrarian is not all that it is cracked up to be. Going against the crowd and buying when everyone else is selling is not easy, but the rewards can be enormous. There is absolutely no doubt the last few weeks have resulted in a chock full of pain for the holders of the “DCVP”- its relative strength was worse than horrible, falling three times more than the Dow’s 2.2% drop. In fact, the portfolio dropped a dubious 7%, from $39.47 to $36.72, in comparison to the Dow’s drop of 2%, from 18,086 to 17,690. Fear and panic are at epic proportions, but so is the opportunity. It is time to be greedy when others are fearful, especially when the companies you are buying have solid balance sheets and are selling for less than intrinsic value. The combination of an exceptional balance sheet and a bargain price, infers that these companies are also susceptible as takeover targets- a very good thing for investors. The only winner of the bunch was Coffee Holdings Inc. (NASDAQ: JVA ), with a token 2% rise. The losers were Bridgford Foods (NASDAQ: BRID ), at the top of the list taking a 15% beating, followed by Fuel Systems Solutions (NASDAQ: FSYS ) at 8%. Rounding out the red ink was Luby’s (NYSE: LUB ) loss of 5%, and Pep Boys’ (NYSE: PBY ) red ink of 3%. The good news is that these losses, can quickly translate into gains, for those opportunists that pounce on these overly hated securities. Easy to say, but hard to do. The lineup: Pep Boys: If the auto parts seller isn’t acquired by next month’s second quarter earnings results, its latest report card could propel its shares further into orbit. The company is expected to earn 8 cents versus breakeven results, on just a 1% increase in sales to $531 million. Those low expectations, should be relatively simple to surpass, especially when you consider the benefits of lower gasoline prices and increased summer driving. Luby’s Inc.: the cafeteria chain is still three months off from reporting its fourth quarter results, but things are beginning to show signs of improvement, as both debt and overhead costs have been chopped. The eatery is slated to pick up a few fresh culinary service contracts, a handful of franchisee locations and a couple new company owned Fuddrucker’s sites by the close of its fiscal year. Wall Street seems to be finally warming up to the company’s turnaround efforts, as evidenced by its Motley Fool Cap’s superb rating, of five stars. There has been an interesting pick up in volume too, as there were two sessions in the past month, that generated 20 times average daily volume. There is an old saying on Wall Street, that volume always precedes price- maybe a price spike is just around the corner. Checking the latest 13f filings (deadline for 2nd quarter is 8/15) it was revealed Ancora Advisors was a big buyer, taking an initial 135,000 share position. With Luby’s shares still near historic lows, I would not be surprised to see its Board of Directors, authorize a $10 million stock repurchase program to take advantage, of its seemingly compelling value. The CEO isn’t waiting, and is taking matters into his own hands. He’s been buying the shares in the open market, like there is no tomorrow. Does he know something the rest of us don’t know? Of course he does. Always follow the smart money. Price target: $8.50 Fuel Systems Solutions: The shares continue their trend of destruction, creating a new historical low despite a nice contract announcement that will be providing compressor and related equipment to a company, that plans to build up to 30 European CNG refueling stations per year. In addition, Ancora Advisors took an initial 134,847 shares position, while Grace & White upped their stake 6.7% to 785,662 shares. This Thursday before the market open, the alternative fuel supplier will be reporting its second quarter results. Analysts are estimating a dismal 10 cent loss, on a top line of $74 million. These “down in the gutter estimates” should be a breeze to surpass, and could spur a short squeeze scenario. Recent 13f filings show that Ancora Advisors purchased a 75,000 share stake and Grace & White pressed their bet another 103,000 shares, to 759,000 shares. Price target: $14 Bridgford Foods: is set to release its third quarter results near the end of August, and a big improvement is in the works. Last year’s quarter produced a loss of 26 cents, on sales of $27.9 million. Lower commodity costs along with a an improved cost structure, should put its bottom line firmly back in the black. It is worth noting, the California Public Employees Retirement System has recently acquired a small position on the shares. Price target: $11 Coffee Holdings Inc.: management is finally getting hot and heavy about promoting the stock-first with its hiring of the Liolios Group (they were contracted by Diedrich Coffee and just one short year later, Diedrich was acquired by Keurig Green Mountain (NASDAQ: GMCR ) at thirty times the price). In fact, next month JVA will present at the Gateway Conference with the aid of the Liolios Group. I wonder if Liolios can repeat their magic again, and get JVA’s shareholder’s a “thirty bagger” too. Heck at this point, I’d be content with a one bagger. Its stock buyback allotment nearly exhausted: the coffee purveyor has nearly gone through its $1 million share buyback commitment. Look for another $1 million of purchases to be authorized, when it reports its third quarter results next month. Last, but not least, Seeking Alpha author “Dutch Trader” recently wrote a flattering piece , which stressed the company’s progress with its Café Caribe brand and its withdrawal from its commodity trading endeavors. Price target: $8 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. Disclosure: I am/we are long FSYS,LUB,PBY,BRID AND JVA. (More…) 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.
Algorithm Aversion – Why People Don’t Follow The Model!
By Jack Vogel, Ph.D. There are many studies showing that models beat experts , including the meta-study ” Clinical versus mechanical prediction: A meta-analysis ” by Grove et al. (2000). However, given this knowledge that models beat experts, forecasters still prefer to use the human (expert) prediction as opposed to using the model. Why is this? A recent paper by Dietvorst et al. (2014), titled ” Algorithm Aversion: People Erroneously Avoid Algorithms After Seeing Them Err ” examines this phenomenon. Here is the abstract of the paper. Research shows that evidence-based algorithms more accurately predict the future than do human forecasters. Yet when forecasters are deciding whether to use a human forecaster or a statistical algorithm, they often choose the human forecaster. This phenomenon, which we call algorithm aversion, is costly, and it is important to understand its causes. We show that people are especially averse to algorithmic forecasters after seeing them perform, even when they see them outperform a human forecaster. This is because people more quickly lose confidence in algorithmic than human forecasters after seeing them make the same mistake. In 5 studies, participants either saw an algorithm make forecasts, a human make forecasts, both, or neither. They then decided whether to tie their incentives to the future predictions of the algorithm or the human. Participants who saw the algorithm perform were less confident in it, and less likely to choose it over an inferior human forecaster. This was true even among those who saw the algorithm outperform the human. Here is an interesting example (from the paper) to describe why this may occur: Imagine that you are driving to work via your normal route. You run into traffic and you predict that a different route will be faster. You get to work 20 minutes later than usual, and you learn from a coworker that your decision to abandon your route was costly; the traffic was not as bad as it seemed. Many of us have made mistakes like this one, and most would shrug it off. Very few people would decide to never again trust their own judgment in such situations. Now imagine the same scenario, but instead of you having wrongly decided to abandon your route, your traffic-sensitive GPS made the error. Upon learning that the GPS made a mistake, many of us would lose confidence in the machine, becoming reluctant to use it again in a similar situation. It seems that the errors that we tolerate in humans become less tolerable when machines make them. We believe that this example highlights a general tendency for people to more quickly lose confidence in algorithmic than human forecasters after seeing them make the same mistake. We propose that this tendency plays an important role in algorithm aversion. If this is true, then algorithm aversion should (partially) hinge on people’s experience with the algorithm. Although people may be willing to trust an algorithm in the absence of experience with it, seeing it perform-and almost inevitably err-will cause them to abandon it in favor of a human judge. This may occur even when people see the algorithm outperform the human. The paper goes on to show that as human confidence in the model increases, humans are more likely to use the model (even if they have viewed the model and have seen it fail). This is described in the figure below. (click to enlarge) Source: “Algorithm Aversion: People Erroneously Avoid Algorithms After Seeing Them Err” by Dietvorst et al. (2014) However, note that even when people have “much more” confidence in the models, around 18% of people still use the human prediction! We are a firm that believes in evidence-based investing and understand that (in general) models beat experts . However, most people prefer the human option after seeing a model (inevitably) fail at some point in time. How does this tie to investing? If we are trying to beat the market through security selection, an investor has three options: use a model to pick stocks, use a human, or combine the two. Inevitably, the model will underperform at some point, since no strategy wins all the time (if a strategy never failed, everyone would invest and the edge would cease to exist). When a model underperforms for a certain time period, it does not mean that the model is inherently broken. In fact, the model could have simply failed over some time period, but the long-term statistical “strength” of the model remains intact. Steve, the human stock-picker, will also under-perform at some point; however, Steve can probably tell a better story over a beer as to why he missed the mark on last quarter’s earnings, that pesky SEC investigation, etc. And since drinking a beer with stock-picker Steve is a lot more fun than drinking a beer with an HP desktop, we will probably give Steve the benefit of the doubt. Successful investors understand that models will fail at times; however, being able to stick with the model through thick and thin is a good strategy for long-term wealth creation. For the rest of us, there’s always stock-picker Steve. Cheers. Original Post