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goldminingXpert (29.64)

Cal-Maine Foods: Great Company, Terrible Stock

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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. 

7 Comments – Post Your Own

#1) On August 26, 2008 at 4:41 PM, anchak (99.85) wrote:

I got out around $40 ( before the run-up to $47) ...... Dexion has an underperform on this based on Insider sell......

 

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#2) On August 26, 2008 at 5:48 PM, dexion10 (27.78) wrote:

Anchak - thanks for the follow-up note on CALM - also thanks for all of your comments - sharing thoughts with other smart folks makes CAPS a lot more fun.

Alright back to your comment on about the insider seling trend at CALM.


INSIDER SELLING:

The insider selling at CALM has never been more intense... $8.6m in 1 month. 


At CALM the insiders have a history of being smart sellers on average the stock has fallen 6-17% after these insiders have sold.

THERE IS MORE FUNKINESS BESIDES INSIDER SELLING:

Read this erie Seeking Alpha Post 

 

The CFO was quoted in Seeking Alpha by an a college student who was on an investment committee at Boston College (I think) and the CFO was convincing this kid to buy CALM stock.

At the same time the CFO was making his biggest sells ever... the CFO also had some lame excuses as to why the stock had an 80% short interest - such as the market makers needed protection from volatility etc.

The CFO also claimed that CALM was able to buy other chicken farms for like $13 per chicken ... yet CALM stock is valued at $40 per chicken.... to me that was a red flag that CALM stock is drastically overvalued.

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#3) On August 26, 2008 at 5:48 PM, dexion10 (27.78) wrote:

Anchak - thanks for the follow-up note on CALM - also thanks for all of your comments - sharing thoughts with other smart folks makes CAPS a lot more fun.

Alright back to your comment on about the insider seling trend at CALM.


INSIDER SELLING:

The insider selling at CALM has never been more intense... $8.6m in 1 month. 


At CALM the insiders have a history of being smart sellers on average the stock has fallen 6-17% after these insiders have sold.

THERE IS MORE FUNKINESS BESIDES INSIDER SELLING:

Read this erie Seeking Alpha Post 

 

The CFO was quoted in Seeking Alpha by an a college student who was on an investment committee at Boston College (I think) and the CFO was convincing this kid to buy CALM stock.

At the same time the CFO was making his biggest sells ever... the CFO also had some lame excuses as to why the stock had an 80% short interest - such as the market makers needed protection from volatility etc.

The CFO also claimed that CALM was able to buy other chicken farms for like $13 per chicken ... yet CALM stock is valued at $40 per chicken.... to me that was a red flag that CALM stock is drastically overvalued.

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#4) On August 26, 2008 at 7:56 PM, Option1307 (29.89) wrote:

Excellant thoughts and I agree completely. I made some bling bling $$ in RL; however I knew it would crash some day and luckily got out at around 44. I had a trailing stop in place b/c its a rather volatile stock. I agree that this is a well run company, but the price had jumped significantly recently and the fundamentals were still the same = destined for a crash...

Good post, nice to see my rookie thoughts are inline with others...

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#5) On August 26, 2008 at 9:54 PM, Tastylunch (29.42) wrote:

Thx for reminding me that I still had this one in CAPS. I meant to close it a while ago.

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#6) On August 27, 2008 at 8:43 AM, Gemini846 (54.83) wrote:

I also put Uperform on CALM around 40. The business model is great, the contracts are great, the increased dividends are great, but I think it's up in the hype and will come down some (and then be a great buy again).  I made some RL money on the ride from 20-30. I was not surprised it made it to 40, but it was way too risky at that point (and very volitile 2-3 pt swings in the 30's).

I have my doubts that it will fall as far as you say in the near term. I think it's got too many fanbois and people looking for dividends will prop it up some.

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#7) On August 27, 2008 at 5:31 PM, dexion10 (27.78) wrote:

HERE IS THE LINK TO THE SEEKING ALPHA ARTICLE

 

http://seekingalpha.com/article/90494-notes-from-my-conversation-with-cal-maine-cfo-tim-dawson 

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