Cal-Maine: Get Ready for a Short Covering Explosion

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.

Comments

[User 179825:]

Unless egg prices drop dramatically(keep an eye on prices in the grocery stores) I agree in principle with the thesis of this article. Let them keep shorting the stock and paying the dividend, and when they abandon the ship and become longs themselves, look out above

2008 Apr 22 02:07 PM

[Gaucho:]

All it would take is 90 million and the shorts hedged fund could be raped. Another entity could accumulate 3 million shares or 1/4 of the float. Keep the shares in a margin account as they accumulated. Once they had reach a point where the the price began to appreciate at an increasing rate the shares could be moved to a non-margined account i.e. forcing a buy back. This should drive the prices to about 90 per share. The smart hedge fund could the pocket about 170 million in profit in one month.

There is no honor among theives. The stupid hedge fund would collapse never to bother the smart hedge funds again.

2008 Apr 22 02:49 PM

[fatcat:]

thres a rumor that cargill will offer mid 40s for calm

2008 Apr 22 04:28 PM

[fatcat:]

sorry for the quick post..when i went to calm research,there was an rumor listed that cargill was set to make a mid 40s offer..that would really screw the shorts!!

2008 Apr 22 04:34 PM

[riceguy:]

Late last Friday, CALM showed 7M of calls. Let's assume if they are exercised, under the present rulings, does it mean that the market maker can sell the 7M without delivering the shares? If that can be done, does it mean that the shorts can easily cover without paying for the pain of the short sqeeze?

2008 Apr 27 05:43 PM

[jaycee:]

So, what do you think about your short squeeze today?

2008 Apr 28 07:24 PM

[jaycee:]

So, what do you think about your short squeeze today?

2008 Apr 28 07:25 PM

[Tom Peavy:]

ONLY TIME WILL TELL BUT HOW DO THE SHORTS LIKE PAYING THE .807 TO .83 CENTS FOR EACH SHARE THEY SHORT TO US LONG SHARE HOLDERS.NEXT QT WILL BE CLOSER TO $2.00 A SHARE FOR EACH SHARE YOU SHORT.

2008 May 01 05:22 PM

[Tom Peavy:]

SHORT SQUEEZE LOOKING SWEET.

2008 May 06 04:11 PM