Cal-Maine Foods, Inc. (CALM)

This looks amazing on just about any value metric, just the sort of small cap I want to invest in, in fact I was sufficiently interested to do more research before considering a purchase.

The issue is it operates in a commodity business, with virtually no barriers to entry. It's all about the egg price. The egg price, which was at $1.50 is now at $1.20, see chart below (I believe those are retail prices, so CALM doesn't see all of that as revenue) yet the normalized price might be $0.75 based on 3Y historic data. It's a commodity cycle, and it's going the wrong way over the past few weeks. CALM's marginal cost of egg production is $0.60-0.70 a case before fixed costs, tax etc (from their annual report $479M fixed costs divided by 683M cases). So you can see the operational leverage is tremendous in either direction. Prices rising is an absolute bonanza, but falling prices are catastrophic.

Super-normal profits will attract more egg production. The price goes closer to $0.75. Normalized cash-flow at those prices are closer to $20M, with a market cap currently of $808M, that's 40x earnings, and the dividend is similarly inflated as its indexed to earnings. It's quite possible the stock halves in 18 months.

Below is the USDA chart of egg prices, in April '08 prices are falling (though some of this is seasonal):
http://www.ams.usda.gov/mnreports/pywgraph1.pdf

Reasons I could be wrong:
Even though prices have fallen, they are still pretty healthy, meaning the next quarter's earnings, and associated dividend, could well be robust.
Still a relatively cheap source of protein as food costs rise
This time might be different due to regulatory changes (larger cages) and higher feed costs
The commodity cycle is tough to predict, and I may be ultimately right over the long term, but wrong in the short term

None of the above constitutes investment advice of any kind, and may be inaccurate. Please do your own research.