Cal-Maine Foods (CALM)

The current short position (14M shares) is at 124% of float (11.4M). This is obviously very high and presumably indicates the existence of naked shorting. History shows that the only instances of successful massive shorting are due to corporate fraud, with ENRON being the poster child.

Assuming there is no corporate fraud, the short positions will eventually be covered, which should cause a massive short squeeze.

The current P/E ratio is at 4.9; Yahoo reports that the average P/E for the industry is 9.6. Even if you assume no future growth in earnings, the stock is underpriced. The ROI is at 70%, which indicates a well-managed, profitable company.

On November 27, 2007 Cal-Maine Foods, Inc. announced that the Company’s Board of Directors has approved the adoption of a variable dividend policy to replace the Company’s present fixed dividend policy. Effective with the third quarter of fiscal 2008, which ends on March 1, 2008, Cal-Maine will pay a dividend to shareholders of its Common Stock and Class A Common Stock on a quarterly basis for each quarter for which the Company reports net income computed in accordance with generally accepted accounting principles in an amount equal to one-third (1/3) of such quarterly income. Dividends shall be paid to shareholders of record as of the sixtieth day following the last day of such quarter and payable on the fifteenth day following the record date. Following a quarter for which the Company does not report net income, the Company shall not pay a dividend for a subsequent profitable quarter until the Company is profitable on a cumulative basis computed from the date of the last quarter for which a dividend was paid.

This type of dividend policy makes CALM shares more attractive to investors.

Since the beginning of the year, shares in chicken and hog businesses have scored solid gains even while the rest of the market went haywire.

Shares of the nation’s biggest egg producer missed the party.

We think it’s just a matter of time before Cal-Maine Foods (CALM) joins the meat and poultry companies in this rise. Cal-Maine gets top marks in all 20 of YCharts checks on fundamentals and relative value, and the company has an acquisitive nature. YCharts Pro says these shares are undervalued. Cal-Maine sells some 800 million eggs in their shells a year and little else. About 15% of its profits come from sale of specialty eggs, such as those from chickens raised organically. Specialty eggs is a growing division, and it typically keeps profit margins for this company above those of the chicken and hog producers.

The company has been a consistent acquirer of other egg operations for more than two decades and says that the egg industry is still fragmented enough to keep at it. Its free cash flow ratio is fine, and its debt quite low. The company says it can comfortably make these typically small acquisitions without borrowing money.

Cal-Maine’s shares came under fire in December when the company announced disappointing second quarter earnings and an unexpected dividend slash. Cal-Maine's dividend policy – 30% of profits in any given quarter toward that quarter’s payments -- make it an inherently poor choice for dividend seekers. It’s a volatile business, so dividend payouts are especially unpredictable.

Sellers also latched on to the very real problem of ever-rising feed costs. The price of corn and soy meal that chickens and pigs eat has skyrocketed, rising faster than the price of eggs. These costs will surely cut into 2011 profit margins for Cal-Maine and all of those meat producers. Short sellers have jumped at this sign of weakness and now hold historically high levels of Cal-Maine shares.

But Cal-Maine has been here before. Rising feed prices also seriously threatened profits in 2008, but long-term shareholders have done well. Cal-Maine's stock has risen about 325% in the past five years.

Factors beyond Cal-Maine’s control – namely, prices for feed and eggs – will always make these shares a little nerve-wracking to hold. But with balance sheet strength; the high-profit end of the business growing; potential gains from acquisitions; and a reasonable share price at 8.5 times earnings, Cal-Maine is a very attractive investment.

As we can see by recent gains in those meat company shares, food is seen as a safe haven for investors in scary times. Right now, the chickens and pigs are overpriced. Eggs are on sale.

By ...Maulik Suthar, Gandhinagar (India)

Egg prices have increased steadily in the past year and demand remains high. Cal-Maine is the country's top egg seller, with over 15% market share.