Cal-Maine Foods (NASDAQ:CALM) is at a record high and is involved in a highly cyclical commodity business. This sounds like a recipe to get burned buying the top. But if you look very carefully, the company is in the middle of a perfect storm, but in a good way. The storm has three components, working in harmony to blow this stock higher still.
1) Record Egg Prices
Since the fall, egg prices have remained at or very near record highs, as you may have observed at your local grocery store. Typically there is a highly seasonal fluctuation in egg prices - higher in fall/winter, lower in spring/summer. Thus, prices should be trending down right after Easter, after demand drops. This boom-and-bust cylce has occurred many times in CALM's history. But things really are different this time. Historically, the typical response to higher prices (with eggs or any other commodity) is to increase production, which triggers a drop in prices and profits. However, adding production now is not nearly as easy as it may seem. Every available cage already has a bird in it. Permits for new facilities are difficult to obtain and take a long time to procure. Most importantly, there are proposals in several states and federally to mandate increased cage sizes, and so producers are very hesitant to expend capital to purchase new equipment, risking obsolescence if regulations change and decreased profit margins and competitiveness operating larger cages if they don't. Vendors that sell such equipment are moving very little of it. Bottom line: Egg prices are not going to drop substantially any time soon.
2) Record Earnings
Because egg prices have stayed high for so long, CALM will in all likelihood post record earnings for the current quarter, which ends this month. Up until now, CALM payed a paltry dividend, but a change in policy (which takes effect this quarter) will pay out one third of earnings as a dividend. Based on recent trends in egg prices and feed costs, I conservatively estimate this quarter's earnings at about $2 a share, and perhaps $6-7 for the next year, giving it an implied yield of at least 6-7%.
3) Record Short Position
The latest available data show that 67% of CALM's float is short, an 11% increase in just the last few weeks. These folks are betting on a price and profit collapse that is not going to happen anytime soon, for the reasons outlined above. With the stock setting new highs almost every day, every one of those shares is underwater. With the new dividend policy, the pain is potentially even worse, because those shorts pay that dividend out of their own pockets. And to top it all off, Goldman Sachs recently filed a 13d, disclosing that they own 6.5% of outstanding shares. If I were short CALM (and I have been many times in the past), I would be very nervous right about now. Buying a stock at its record high can be risky, but fundamentals and a short squeeze (which I think is happening right now) is highly likely to send this even higher.
Disclosure: Author has a long position in CALM