Cal-Maine Foods (CALM): The Perfect Downturn Stock
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People still have to eat in a downturn, says Wayne Mulligan in Penny Sleuth. And as household budgets get tighter, shoppers are least likely to get rid of staple foods.
This makes an investment in eggs a great way to play the downturn. That’s because the humble egg is one of the great American food staples.
One of the best ways to invest in Americans’ reliance on eggs is through Cal-Maine Foods, Inc. (CALM). The company produces almost 15% of the eggs eaten in the US. Its market share is growing. And it has a rock-solid set of financials…
Operating Margins are north of 30%, Net Profit Margins are at roughly 20% and the company’s Return on Equity (a metric I love to use) is over 25%!
To put that in perspective, the average company in the S&P 500 has profit margins of 11% and Returns on Equity of 15%, so Cal-Maine is definitely running a tight ship.
But things haven’t always been this great for Cal-Maine and the other egg producers in the U.S. They’ve had a little help from the corn market…
Due to the rising cost of corn, Cal-Maine and other egg companies have seen their feeding costs rise by 30% this year. That may sound like bad news but since eggs are such a customary item on American breakfast tables, Cal-Maine has been able to raise its prices right along with its costs. In fact, the company was able to increase its prices above costs and expand its margins and profits as well.
That’s why this company’s stock has practically doubled over the last 12 months — and many folks, including Barron’s, think it could double again.
I’m not sure about a double, but with a stock that’s trading at a $900 million market cap and paying an 8%-plus yield, I’d still feel comfortable socking Cal-Maine away in my portfolio for a while.
But I’m also going to keep an eye on the corn market. If the price of corn begins to come down in a significant way, you can bet that Cal-Maine’s profits and stock price will drop right along with it.
PS: As well as writing for PennySleuth.com, Wayne Mulligan is the founder of Tickerhoud.com. The site is an open platform for investors to answer other investors’ questions on a wide range of subjects. It’s well worth checking out.
Source: Turning Eggs into Dollars
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Tags: CALM, Downturn Strategy, US recession, Wayne MulliganAbout the Author
Wayne Mulligan is a contributing author to The Penny Sleuth.
The Penny Sleuth is free e-letter from Tom Bulford who shares his innermost thoughts, stories, projections and opiniosn on the UK's most exciting share market. Each issue reveal what every investor ought to know before investing in the small-cap market.
Comment by James Cullen on 25 July 2008:
I’m surprised you didn’t mention the massive short interest in this stock; obviously there is someone out there who feels differently than you to the tune of 100% of outstanding shares.