Cal-Maine Foods: Great Company, Terrible Stock
August 26, 2008
– Comments (7) |
RELATED TICKERS: CALM
A problem a lot of people have is that they fall in love with the story of a company and disregard all other factors. Sadly even the best of us can get tripped up by this, I know I have. Cal-Maine Foods (CALM) is one of these. They run a great business with dependable profits. Their business: selling eggs. People enjoy eating eggs--recession-proof for sure. However, the commodity bubble dragged this one along and totally seperated the stock price from the reality of the business. Eggs are a commodity, an egg is an egg is an egg. If CALM's margins go high enough, competitors will come in with their own chickens and lower the margins. There is no moat here.
You look at the P/E and say, 6, that's awesome! However, that is trailing P/E, the price of eggs is dropping faster than spilt milk. What you're really doing is paying almost 4x book for chickens. Anybody can raise chickens. Why plunk down $39 a share for stock to get $11.60 of chickens? It's ridiculous. As egg prices drop--along with all other commodities--the P/E will inflate and the stock will collapse. At that point, this stock is a buy, management is highly competent. However, at this level, shareholders will get crushed. 80% of the stock's float is short it... I doubt that many shorts are wrong. Sure you may get a squeeze, but that's a one and done event... the shorts will eventually be right and this will trade around 1.5x book ($17). That's more than 50% down from here.
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