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Josh Enomoto

Is the Discount in Cal-Maine Foods (CALM) Worth the Risk?

By arguably most measures, American fresh egg producer Cal-Maine Foods (CALM) seems too risky to be worth a gamble. For example, one of the takeaways about CALM stock is that it’s cheap. Right now, shares trade hands at 2.86X trailing-12-month (TTM) earnings. However, it’s quite possible that the underlying investment is too cheap.

Take a look at the annual dividend yield, which clocks in at 19.94% based on data from Barchart’s company overview screen. All other things being equal, you can load up the boat on CALM stock and enjoy 20% returns annually, a far better performance than the long-term average of roughly 8% for the benchmark S&P 500 index.

Of course, not all things are equal and acquiring shares of extremely high-yielding enterprises can rank among the riskiest endeavors in the capital markets. Primarily, the passive income may not be sustainable. And given that Cal-Maine’s payout ratio stands at nearly 640%, it wouldn’t be the most surprising development if the company cut its dividend.

Indeed, with CALM stock suffering a nearly 19% drop since the beginning of this year, investors may be anticipating such a cut. Of course, should Cal-Maine or any dividend-bearing company implement a negative action on its payout, stakeholders will likely exit the investment, depending on the severity of the cut.

Therefore, speculators have plenty to lose regarding CALM stock. Nevertheless, the latest rumblings in the derivatives market suggests that Cal-Maine might be worth a look for those with some loose change burning a hole in their pocket.

CALM Stock Lights Up the Screener for Unusual Options Activity

While not a perfect indicator, traders often consider unusual options volume to assess what the smart money is doing. Extraordinary swings from normal volume levels may indicate a big move ahead for the targeted enterprise.

In particular, call options for CALM with a strike price of $45 and an expiration date of Aug. 18, 2023 – 25 days from Monday’s close – represented the most unusual activity. Volume hit 1,834 contracts against an open interest reading of 343. Generally speaking, options featuring high volume and comparatively low open interest indicates a limited secondary market for said options, thus implying low liquidity.

On paper, CALM stock doesn’t offer the most comforting profile for prospective investors. For one thing, several analysts have downgraded Cal-Maine because of yield sustainability risk. Per MarketBeat, “There is a justifiable concern surrounding the sustainability of these dividend payouts; if the financial symptoms of the underlying business turn negative amid these analyst expectations, free cash flow may suffer to a point where management may need to reduce or postpone dividend payouts.”

Overall, the current consensus view of CALM stock is moderate sell, breaking down as one hold, one moderate sell and one strong sell. Further, the mean price target for CALM is only $45.67, implying almost no upside potential for anyone acquiring shares now. If that wasn’t enough to make prospective investors reconsider, the Barchart Technical Opinion indicator rates CALM an 88% strong sell.

Nevertheless, it appears that some options traders are willing to wager on CALM stock. At least for the near term, these contrarians may be sensing that a bottom is in. For instance, while CALM slipped over 16% in the trailing six months, in the past 30 days, it lost about 0.4% of equity value. And in the trailing five sessions, shares gained 2.5%.

Fundamentals Might Help Cal-Maine

Although the natural instinct is to be skeptical about CALM stock, it’s also possible that the present difficult economic environment might, in a very strange way benefit Cal-Maine. Fundamentally, the combination of a consumer behavioral pivot and the trade-down effect may help the fresh egg producer.

First, although the Federal Reserve has enjoyed some modest progress in its fight against inflation, a decisive victory would imply a noticeable cooling of the labor market. Sure enough, the mass layoffs that clouded the technology sector last year continues to proliferate this year and across several industries. Therefore, consumers may need to pivot away from discretionary purchases toward more critical goods, which may lift CALM stock.

Second, Cal-Maine sits favorably on the lower rungs of the trade-down effect. Regarding the broader food industry, consumers might not give up fresh culinary delights entirely. However, they could potentially trade down from eating out at restaurants to buying quality ingredients at the grocery store and subsequently cooking at home. In this case, Cal-Maine could be insulated while the more discretionary segments of the food sector suffer.

Granted, it’s a tough call because of the possibility of a dividend cut. Still, Cal-Maine might perform surprisingly well because of its core protein business. For those interested in a potshot, CALM stock could be enticing for speculative bulls.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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