What Will it Take to Push Cal-Maine (CALM) Higher?
July 31st, 2008 by 
James Cullen
Egg producer Cal-Maine (CALM) reported earnings before the market opened this week. EPS for the quarter came in at $1.54, and although difficult to gauge without estimates, seems to be on the top-end of most of the informal ranges I’ve read. Despite this, the market seems unimpressed - the stock has only nudged higher by about 3%. Normally I wouldn’t pay too much attention to this, but Cal-Maine’s huge short position (roughly 100% of outstanding shares, with some accusations being made about naked shorting) would presumably make the stock vulnerable to a squeeze if any new information were to either bring a block buyer on board, or cause the short fund(s) to question their position. Nothing of the sorts appears to have happened yet, as trading volume has been average and not suggestive of any major players making moves.
We’ve seen CALM hover around $37/share around earnings before, and last time around the intermediate result wasn’t pretty. Still, CALM is higher year-to-date in the face of a market that hasn’t been kind to most long positions. And this hits at the heart of the conundrum I see: the company has been performing fine fundamentally even if there’s almost assured long-term mean reversion, the short position is ridiculously large, and the stock has held up even with all the additional issued shares - some of which are likely naked. So what’s it going to take to either break the shorts and send this stock up huge, or convince those who are long the shorts are correct?
The realization of value question is doubly troubling because even if my estimates that normalized earnings, or a metric like price-to-flock, places the value of CALM shares around $15, the huge amount of short covering that needs to be done makes me wonder how long it will take to get there. Try as I might, I can’t understand how the risk management desk at some short fund out there has allowed continued involvement in something that just screams short squeeze. And yet, this has been televised as a short squeeze for several months, and it’s been much more of a slow melt-up to retest the highs with none of the supposed catalysts materializing. Given the huge short bet, the funds wagering this goes down have to stay on top of the stock - because any quick move higher could start accelerate rapidly if covering occurs.
These technical factors, combined with a business I don’t see as having any sustainable competitive advantages, makes me continue to be cautious and view Cal-Maine as the next great short squeeze that wasn’t, isn’t, and won’t be. Keep in mind, I write all of this as someone who is responsible for overseeing club funds that hold CALM as one of the top handful of positions, even though I haven’t, don’t, and probably won’t feel comfortable with that allocation.
For now, my two points of interest specific to Cal-Maine is the purchase price for the Zephyr acquisition, which should give some ability to create and utilize a metric like price-to-flock, as well as the status of the company’s auction-rate securities. Although the ARS aren’t a huge issue as Cal-Maine should have ample liquidity in the coming months, additional disclosure will help understand how the company is going to reinvest its surplus capital and what kind of marginal returns are expected. I have a request out to Cal-Maine for comment on those points, and will post more once I have their color.
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August 2nd, 2008 at 12:31 am
I first saw CALM during its initial run up and don’t like to chase a stock. I forgot about it until recently when I decided to watch more agriculture than fertilizer and tractors. I remembered CALM and kicked myself for not following it after I saw the pull back and advance. Looking at the chart and fundamentals, my question is how can it not go up?
With a PE of 6.1 and reasonable debt and decent margins and a dividend of 5.3% … am I missing something?
The chart appears to want to form a cup and handle … already has a short handle. Could expect the handle to drop to 34.
You say there is approximately a 100% short position? The only way a drastic drop in price might occur would be for massive additional stocks being issued by the company … do they want to raise cash? Would management cashing in stock options add additional shares to dilute outstanding shares? (I’m not sure how that would work). Other than something like that, a cup break out might cause a short covering rally. Looks like a buy to me. (buy at 34 as momentum suggests a pull back) Or at the break out.
August 16th, 2008 at 6:59 pm
Smcelroy — the dilutive effect of the exercise of all outstanding options, warrants and other derivatives is available by looking at the company’s financial statements, especially “diluted” eps (earnings per share) versus straight eps. The effect would be miniscule ($0.01 decrease in eps).
The company could issue additional stocks (it has 60 million authorized, but only 35 million issued) or sell some of the 14 million stocks in its treasury, but this is highly unlikely as they are flush with cash and do not need to raise any, nor have they shown any inclination to do so in the past (over the years, they have sold only a maximimum of 125,000 shares from the treasury in any given year).
Are you missing something? Yes, the price of eggs and the company’s earnings have historically been very inconsistent from year to year. If next year’s eps drop to $1.50 (from 2008’s $6.40) like they were in 2007, your PE of 6-7 becomes a PE of 24-30!
Just one comment on Cullen’s statement above : “the stock has held up even with all the additional issued shares ” is inaccurate. Short-selling does not result in the “issuance” of shares. I think what he meant to say is either that heavy short-selling normally puts downward pressure on prices just like any heavy selling, long or short, does — OR — that naked short selling creates a dilutive effect similar to the issuance of shares by creating “phantom” shares (although it does not literally do so, and this effect is heavily disputed by experts).
August 27th, 2008 at 9:06 pm
The reason there is a huge short interest?
Because they sell eggs. If the price of eggs goes up, competition steps up. This is a Macroeconomics class 101 here. It’s a public corporation doing a roll-up of newspaper vendors in NYC. It’s perfect competition.
If egg prices go up then producers respond by hatching new chickens (18 months i believe but could be very wrong)up until capacity is used up. If egg prices are THAT strong then fixed capacity needs to be added then it will.
Think about it. What’s the cost of making new chickens? Presumably not very high. What about ‘fixed capacity?’ I think fixed capacity is not much more than another barn, maybe property, trucks? Not exactly like building a new assembly line or power generating station.
So here is an egg producer that has an almost double put in since early 2008, all of 6 months. It’s a commodity business, its not like these guys are drilling for oil in the artic or 50 miles offshore.
August 27th, 2008 at 9:12 pm
By the way, smcelroy, coming from a former institutional trader on Wall St…..that cup and handle bullshit…not a good reason to buy and sell stock. I won’t argue there are trends in markets as the story of the fundamentals ripples through the different canyons on wall street and sentiment is enforced or changed…
But the cup and handle, reverse triple lindy head and shoulders charting stuff…don’t believe in it. I’m not ignorant either, I’m a former level II CMT. But take it from me, the groundhog seeing his shadow is a better indicator than technical analysis.