Is Cal-Maine Foods Setting Up for a Short Squeeze?

| About: Cal-Maine Foods, (CALM)

Is Cal-Maine Foods (NASDAQ:CALM), the company that puts eggs on the breakfast table for millions of Americans, setting up for a short squeeze that could send the price of the equity from current levels of about $28 per share to highs of $34 per share that we saw back in December of 2010? It is likely a question that many CALM investors are asking at this point, as CALM has spent the last five months caught in a trading range between $27 and $29 while short interest has grown from 3.5 million shares to just shy of 5 million shares.

The incredible thing here is that the short interest represents 37.82% of the float and, given an average volume of 137,000 shares traded, it could take 40 days for the short interest to be covered. Finding little gems like such a high short interest with a large amount of days to cover can seem like a dream come true, but investors also need to consider that CALM is not a highly traded stock these days.

There are many factors at play with an equity like CALM. Being tied to the egg business, it is a company that is highly susceptible to moves in the commodity market. The price of corn, for example, used to feed chickens, can carry a huge impact on the bottom line for egg producers.

With the economy as weak as it is, some commodity prices have been hitting high prices all year. In many ways the price of eggs, the possible profit from them, and the performance of companies like CALM have a direct correlation to certain commodities. This is something all investors in this sector need to consider.

One example would be that if wholesale prices of eggs remain stable, but the cost to feed the chickens decreases, it could change the profitability of a company in short order without an actual price increase on eggs themselves.

In my opinion, Cal-Maine Foods is in the middle of a lull that could last a bit longer yet as the summer approaches. What could make that lull shorter than normal is a stark change in commodity prices that scares the shorts into covering and reversing their strategy. Savvy investors can capitalize on this by getting into CALM on dips and watching the market closely.

The lowest price for CALM over the past year is about $27 per share. This gives investors an idea of a realistic downside. The high in that same period is about $34, which shows the possible high side. With CALM sitting at $28, it appears that we are now at the bottom of a trading range. This fact alone makes going long on CALM a realistic strategy. Now add to that the events in the commodity market and the short interest that has seen flat equity prices over the last five months, and we could be looking at a recipe for some decent moves.

Disclosure: I am long CALM.