Does Cal-Maine Foods Fit in My Portfolio?

 

So I decided to skip the obvious egg puns that I could have used in the title. I just didn’t have it in me. So what’s this about eggs? Cal-Main Foods (NASDAQ: CALM) is the largest producer of shell eggs in the United States. They have somewhere around 23% of the U.S. egg market, and are located mainly in the southeast.

So the first thing you might notice about this company is that it isn’t very sexy. I’d say that it’s downright boring. They don’t produce the latest silicon chips, or promise day-trips to the Moon, or even (to my knowledge) create entertaining YouTube videos. They produce eggs, lots and lots of eggs. They are a fully integrated egg producer. They own feed mills, hatcheries, processing and packing plants, distribution centers, pullet growing facilities, breeder flocks… etc. Soup to nuts, if it’s involved in producing eggs, this company has it, and for the most part OWNS it. I like that. Very little of their production is contracted out, only 4% according to their website. Still not too interesting?

So what’s been happening in the sleepy little egg industry lately? How about the government mandated slaughter of tens of millions (of chickens) to stop the spread of a disease threatening to wipe out entire populations (of chickens)? This happened a little over a year ago and sent wholesale prices of eggs soaring! How’s that for interesting? It may not be the latest episode of The Walking Dead, but it got my attention. Cal-Maine chickens were unaffected by the Avian flu, so guess who had a steady supply of fresh eggs to sell into the demand? Record profits! This more or less sent the stock from the mid $30’s to over $60 about a year ago.

Big deal, right? That was in the past, how does this help me now? Well, the laying population has recovered. The supply/demand imbalance has tipped the other way. Egg prices are near 10 year lows. GASP! When they reported Q4 results this July, they LOST a penny a share. Not bad considering they were expected to lose 19 cents a share. Yesterday, the 26th of September, they reported a loss of 64 cents a share, totally missing the expected loss of 33 cents. Revenues were down 60% from the same period last year. The share price hit a low of $40, which seems to be a strong level of support. But if it breaks below the support, there could be a major selloff. Expectations for near-term earnings are not good due to the low egg price environment. You know what happens to companies with shrinking earnings? Look out below… or so I’m hoping.

Cal-Maine Foods has a variable dividend policy. Basically it pays dividends only after profitable quarters, at a rate of one third of the income. Their dividend is all over the place, but it’s almost always THERE. But of course there is now a two quarter gap in dividends. But I think there’s something here.

Eggs are a cheap source of protein. For that and a zillion other reasons I won’t go into, it seems pretty obvious to me that demand for eggs isn’t a thing of the past. They industry isn’t going anywhere. I think Cal-Maine Foods is simply going to get bigger and bigger. They have a history of acquiring smaller egg companies. In one of their investor presentations, in a slide titled ‘ACQUISITION OPPORTUNITIES’, they list about 60 competitors by name. (How ballsy is that?) In fact, on August 2nd they announced their intent to acquire Foodonics International, Inc. and its entities doing business as Dixie Egg Company. The timing seems good, and Cal-Main’s balance sheet is great. It would only take about half of their cash and short term investments to pay off all of their liabilities. Why not buy up some smaller competitors while egg prices are low and the industry is at a discount?

Let’s talk specialty eggs. Nutritionally enhanced eggs! Organic Eggs! Cage Free Eggs! Anything ‘organic’ is hot, but look at the cage free egg phenomenon. Here’s a
Motley Fool article about all the companies that are demanding cage free eggs, and how CALM can benefit from it. Specialty eggs represents between a quarter to half of revenue for Cal-Main Foods, (depending on regular egg prices it seems) and the business is pivotal in the company’s growth strategy. Specialty eggs are less subject to price declines in the current environment, and tend to have higher margins.

So what eggxactly is the plan here? (sorry, I had to put one in somewhere). I’m going to take a wait and see approach to this. That seems to be a common theme for me. I’m hoping continued weakness in egg prices, the lack of a dividend for a few quarters, and some good old fashion general market weakness bring this down a considerable bit. Will it happen? Who knows, but I’m thinking that about $32 might be a good place to start a position. If I’m feeling brave I could start buying around $36.50. I could see myself holding this long term if things work out in my favor. Egg based dividends spend as well as silicon ones.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

All Options are on the Table

All options are on the table! WOOOT!!!! But what do I mean by that? As those of you who’ve been following my adventures in the stock market know, I’m currently very cautious when it comes to the market overall. To be clear, I actually think it will make new highs from here, so I’m not calling ‘the top’ or anything. I don’t claim to be that good.

Within the last several weeks I’ve sold most of my stock (for some very good profit), and I’m about 75% in cash. But here’s the thing, there are companies out there that I like, that are close to levels where I’d like to start a position. But what if it turns out that I’m right, and the market has a large correction sometime in the next 12 months? Well then, I’ll just buy MORE as they go down. It’s been working for me so far. But what about an additional strategy?

Via put options on stocks that I believe are overvalued, I can profit from their decline. (Here’s an Investopedia article about the basics of options.)  I can buy significantly out of the money put options that are good for ‘long’ periods, even over 12 months. If I’m right, I can make a significant amount of money by only investing a small amount upfront.

If the market tanks, these options could potentially act as a hedge against going long in the stocks I’m considering buying. If the market moves sideways, it’ll just be good old-fashion stockpicking: what am I ‘long’ versus what am I ‘short’? If the market keeps going up… well, I don’t plan on spending a ton on options, but I’ll likely lose most, if not all, of the option investments.

The GOOD: Options are relatively cheap versus the number of shares they can ‘control’. Some big money is possible using only a small investment. Shorting stocks directly is dangerous and I don’t ever plan to try it, while options only risk the amount of money invested.

The BAD: You have to be right with your timing to make money in options, even long term ones. Options lose money over time, all else being equal. Why invest in something like that? Am I THAT good?

The UGLY: What if I’m just getting cocky because of my market trouncing performance so far? What if I’m getting too fancy, too big for my britches? Options, hedges… etc. I’m just an amateur, what am I doing playing with options? I could lose my shirt. Shouldn’t I simply stick with what I’ve been good at so far? I could blow 10% of my portfolio on options that expire worthless, and still be beating the heck out of the market… but should I take the risk?

I’ll admit that when I use terms like ‘hedging’, I start to think I’ve read too many investment books. (It’s a favorite pastime of mine) So I’m aware of the vast potential for hubris here. I plan on fighting these propensities by remaining small in the options game, and not be in a hurry. I don’t think the market is going to crash tomorrow, so I can take my time. I am fully aware that options are high risk, and most people who buy out of the money options tend to regret it. I could very well end up being one of those people, but I’m planning on giving it a try with a small amount of money.

What companies do I feel have the potential to become overvalued if the market pulls them significantly higher? I’m thinking about some of the companies I’ve made money on in the past.

Energy Transfer Equity (NYSE: ETE) was good to me on the long side, with a 222% gain over 7 months. I sold it last month, and am happy I did. If it shot up to the mid $20’s I might buy some puts. It’s had a GREAT run, but the dividend is far from assured.

Ambarella Inc. (NASDAQ: AMBA) was a good investment as well, up 70% over about the same time period as ETE. I still like the company long term, but if it shot way up from here I’d consider some puts. But then, if it tanked from here I’d be a buyer.

I haven’t talked about Mattel Inc. (NASDAQ: MAT) in awhile. It was good for a 43% gain when I sold it in February after holding it about 6 months. It hasn’t done much since, but the valuation seems high, in my opinion. The dividend is far from assured, and any stumble in the turnaround story could send the stock down. A rally on little news might be a good opportunity to take the other side.

Simply because I’ve sold these companies doesn’t mean that I’ve stopped following them. At some point I hope to buy them again at lower levels, but now I’m considering expanding the tools at my disposal. At this point these are just some ideas I’m kicking around, not hard plans, but you can see my thinking. As I stated above, I believe the market is headed higher in the very near term, despite the negativity of the past several trading days. If I’m right, that might be the perfect time to try my hand at puts.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

Will Skechers Fit My Portfolio as Well as My Feet?

That’s an awful title, but it fits. I love Skechers, the product. One of the things that bartenders, waitresses, and barbacks routinely discuss is what brand of shoe is best for standing/walking for 8 hours straight. I am always firmly in the Skechers camp in each of these conversations, and have the evidence on my feet to back me up. So I love the shoe, but what about the stock?

So how did I get interested in Skechers U.S.A., Inc. (NYSE: SKX) the stock? I’ve kept an eye on it for awhile, without really digging into the story. A few Wednesdays ago I was at a local outlet mall at the Nike (NYSE: NKE) store with my wife. She has no brand loyalty when it comes to shoes, but we were there to buy something for one of her foreign family members. Apparently Nike is cheaper in America??? I don’t know.

I didn’t need shoes, but I got the bright idea to go look at the Skechers store to see how much business it had compared to Nike. So I walked over, resisting the temptation of the frozen yogurt store on this hot August day in the greater Reno area. Now I didn’t do an exact head count, but I estimated that there were almost the exact number of adult customers in each store. I owned and operated a retail business for nearly ten years, so I felt fairly confident in my estimation. The thing is, the Nike store is over twice as large. The Adult Customer Per Square Foot metric (The ACPSqFt) seemed favorable, so I want to buy Skechers, the stock.

Ok, so it’s not quite that simple. On July 21st Skechers reported earnings of 50 cents per share, vs analyst estimates of 52 cents. The stock tumbled from about $32 to $25, going as low as $22.50 around a week later. So why the huge drop in price?

Earnings were hurt by a few things that an investor might not consider game changing. There was a fire in a Malaysia factory, a tax bill due in Brazil, and the same old currency exchange issues that are affecting many companies that do business overseas. There was also an issue with the timing of some shipments from April into March that didn’t help the situation. But what was the real problem?

Second quarter revenue was up 9.7% from the second quarter last year, and set a new second quarter record. However, recent quarterly growth numbers have hovered around 25% or higher, so that was quite a disappointment. The problem here was domestic growth. Domestic wholesale sales (sales to non-Sketchers stores) were down 5.4% compared to the same quarter last year. Domestic retail was up 15.4% at Skechers stores, but that didn’t matter. Investors fear that the domestic market might be saturated with Skechers product. America has had enough of Skechers, so run for the hills, batten down the hatches, and maybe buy Nike? Or perhaps Underarmor, Inc. (NYSE: UA).

But hold on, at the same time that the domestic story was called into question, foreign sales were up 40% from the same period. And foreign sales made up nearly 42% of the business. Skechers is expanding overseas, building stores, building out shipping facilities, and just generally doing a fine job of exporting our footwear culture to the world. While domestic growth might be cooling off big time (might), international seems like a great opportunity that is still in full swing.

So what about some of the footwear alternatives out there? Skechers has a trailing P/E of about 14.5 and a forward P/E of around 12. Nike is running about 27 & 22, while Underarmor is around 100 & 55. I don’t put these numbers on a pedestal and warship them because the forward P/E is based on estimated earnings, which may or may not be correct. And even the trailing P/E, based on historical data, can be wildly different depending on what financial website you look at. This was the case here, so I kind of averaged it out. These numbers are close enough for me, and it seems like Skechers is, valuation wise, a better deal than some of its competitors, especially if you think they have room to grow internationally in any significant way.

But of course analysts and the financial news were none too kind to Skechers after the quarter. In doing my research for this piece I came upon a wonderful article on Seeking Alpha by Tansy Trading. The article is half about Sketchers and half about a very cynical view of how Wall Street works. I happen to agree with a lot of the cynicism. It’s a great read and I recommend taking a look.

Another reason I like Sketchers? The balance sheet. They have roughly $630 million in cash and cash equivalents. While there total liabilities are $767 million. They could pay off the vast majority of their TOTAL liabilities with cash. That’s a nice position to be in. If there were some rough times ahead for the company, it’s not like their liquidity or survival could be called into question.

I suppose the real question is this: do I believe that this mixed quarter represents a true slowdown in the company, or was it a bump in the road that’s simply giving me an opportunity to buy?  As I write this, SKX can be had for about $24. All things being equal, I’d say this was a good time for me to start a position. However, for those of you who’ve been following along, I’m expecting some pretty significant weakness in the market in the fairly near future. Maybe I’ll just wait and see on this one. Perhaps I can get it closer to $20? Under $20? Who knows? Most of my portfolio is in cash, and I’m playing a waiting game with the market. Will Skechers wait for me?

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada