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In the past two years, it has not been a wise decision to bet against Cal-Maine (CALM), the largest domestic egg producer in the U.S. The company has seen its earnings power grow tremendously, mainly as a result of increasing pricing power brought about by strong global demand (mainly from China). As the middle class in developing countries around the world continues to expand, more people will want to consume protein. Therefore, CALM's pricing power should accelerate rather than decelerate into the future, as more people will demand its products.

The company's first quarter was arguably one of the single largest earnings beats on Wall Street. Its EPS tripled from $0.74 to $2.41 on 59% higher sales. If the company was to maintain this pace of earnings it would earn $10 a share, and be trading at $3 a share at current levels. Management has consistently maximized shareholder wealth, and it recently announced a variable dividend policy that will distribute one-third of earnings back to shareholders. At current price levels, that translates into ~2.75% or roughly 11% per year.

Some people have refrained from owning the CALM due to the incredibly large short interest, which currently stands at roughly 90%. While some short sellers are certainly shrewd, shorts have gotten this one wrong for almost two years as the stock quadrupled in value. Even given the rapid price appreciation, it is currently trading at 5 times trailing earnings while growing earnings at +30% per year. Even if growth were to decelerate to 10% per annum, this would still be cheap.

The high short interest should encourage rather than discourage an investment in CALM. There is no more powerful formula for price appreciation than a high short interest coupled with fundamental outperformance. Shorts usually have a short time horizon, and get increasingly frustrated and distrustful of each other, as things don't go their way. I expect a massive short covering rally in this name and highly encourage investors to get aboard for the ride.

Disclosure: The author is long CALM.

Source: Cal-Maine: Get Ready for a Short Covering Explosion