An Eggcellent Investment

Posted On August 3, 2016 2:50 pm

Shares of this egg production company have slid in recent weeks and now offer an excellent buying opportunity. Cal-Maine Foods (CALM) is the second largest producer of eggs in the U.S. with both brand names such as Land O Lakes, Egg-Lands Best and private label. It distributes nationally to supermarkets, restaurants, hotels and other wholesalers generating some $2 billion in annual sales.

Unlike its fragile product, the company’s business and share price has shown itself to be incredibly resilient, enjoying solid growth – both organic and through acquisitions – through good times and bad. But plenty of traders remain skeptical as the stock has a very high level of short interest, leaving it susceptible to a squeeze.

The company, which has been public since 1995, basically flew under radar with the shares sitting around $2 on a split adjusted basis for its decade. Then, thanks to the popularity of the protein heavy Atkins diet, investors took notice and shares flew the coop, gaining some 400% from late 2003 to 2004.

Shares then drifted lower for the next few years, but the business showed its resilience during the financial crisis as the stock once again more than doubled, from $10 to $23 during the two-year period from 2007 to early 2009 before succumbing to some selling at the depth of bear market.

But Cal-Maine was quick to regain its footing and share enjoyed steady uptrend over the next few years gaining 400% before peaking at $62 in late 2015.

The stock has since slid 33% and now stands at key support $40 level. I think represents a good buying opportunity.

Calm chart long term 8.03.16

The stock sold off sharply on July 18 following its Q4 earnings report, which saw a sales declined 4.5% to $253.077M as the average price fell 21.7% Y/Y to $1.152 per dozen, which negatively impacted margins. The company did manage to beat the bottom line EPS of $0.96, a 3% increase from the year ago period.

Overall demand remained robust as dietary shifts, in which protein is embraced as new studies show the potential negative impacts, such as high cholesterol from foods such as meat and eggs, has mostly been debunked and the “breakfast anytime” trend boosts consumption.

The company also announced it signed a letter of intent to acquire the assets of Foodonics International to help boost its specialty and ‘organic’ egg lines, which now account for 26% of sales and are expected to enjoy low double growth over the next 5 years.

Is the Sky Falling?

There are plenty of traders who think the shares will continue to fall from current levels. The shares, which only have 47.44M shares outstanding with a float of only 30.03M shares had 15.5 million shares sold short as of May 31. That is a whopping 50% of the float sold short!

In fact, the shorts tend to press their best as shares fall in hopes of breaking this $2 billion market capitalization stock.

CALM Short image 8.03.16

I think with shares holding the important $40 level they will be scrambling to cover, which will set the stock up for a squeeze higher.

I’m playing this through the simple purchase of calls. Specifically;

-Buy the November 45 Calls at $1.30 a contract

My expectation is shares can rally back to $50 by the November expiration giving these calls a minimum value of $5 for a 280% gain. That would be an eggcellent profit.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.