Dec 28 - Put Some of Your Eggs in CALM's Basket

Blowout Sales and Earning Quarter for Cal-Maine Foods, Inc. (CALM)


Cal-Maine Foods, Inc (NASDAQ: CALM, $27.32) announced their fiscal 2Q 2008 earnings on Thursday evening, up huge - over 500%. The stock responded today with a 5.7% gain on ten times its normal daily volume.


Cal-Maine Foods Inc. (CALM) is the largest US supplier of eggs, and the stock has been a recent strong performer. The stock closed today at $27.32 a share, at the lower end of its trading range today that topped out at $31.45 early in the trading session. Still, the stock was up $1.47 from Thursday's close - a gain of 5.7% for the day. There are several reasons I think this is only the start of a larger bull run in the stock.

Today's big stock move in huge volume was all about earnings, and a potential short squeeze. Back in 2004, short sellers made money betting against CALM, but this time I think they are going to be wrong. Although the company is facing pricing pressures from feed corn increasing costs, the price of eggs has been healthy and the company announced they expect this to continue into 2008, beefing up their revenues substantially.

Thursday the company announced revenues of $223.7 million vs. $137.7 million in the same quarter a year ago, an increase of 62%. Earnings increased to $40.2 million ($1.70 per share) from $6.4 million ($0.27 per share), an increase of 528% from a year-earlier results.

Some statements from the chairman and CEO Fred Adams, Jr. in their announcement:

"These results reflect the favorable market conditions, with egg prices reaching record levels during the quarter .... All of our operations performed well during the period... demand for fresh eggs was strong for both the retail and food service markets, as well as demand for eggs used for liquid, frozen and dried egg products. The export markets also have been very strong this year, we expect Europe, the U.K., Japan and the Middle East to be good markets for eggs in 2008.

"Looking ahead, our feed costs remain high, ... with the high demand for corn for ethanol use... However, the egg industry and USDA predict that egg production will be similar to 2007 levels, and this should support profitable egg prices for the year ahead. "

Gross margins for the quarter increased dramatically to 34% from 18%. If Adams is correct and egg prices remain healthy, the two quarters leading up to and including the Easter season should be very profitable and well ahead of last year's earnings numbers.

And Adams has lots of good reasons to make sure the company performs well. He and other insiders own 39% of the stock. This also reduces the number of shares in the daily float dramatically. Taking this into account means there is only 13 million shares in the available float - and short sellers have sold a whopping 50% of this float short, or 6.5 million shares. Even if there was some short covering in today's action, that leaves a lot of room left for a short squeeze on the remaining short holders. Those who were betting on the price pressure of rising feed costs are not going to be happy about the quarter earnings and management's forecast of similar results. Short positions are going to need to be covered in the coming days, creating an even more bullish price action.

The November USDA egg report showed a lower than expected increase in hatching flocks, which has driven the price of eggs up in recent months. Because egg producers have more control over egg volumes than meat producers, and because of the continued consolidation in egg producers, there is good support in the near-term for egg prices. CALM has been one of the main reasons: they have bought many independent suppliers over the last decade and are now the largest US egg producers supplying 29 states. The USDA does predict a slight increase in U.S. egg supply over the next year.


Fundamental Buying Reasons for Cal-Maine Foods:

1. Huge increase in revenues and earnings, due primarily to the current egg pricing in the USA, which the industry and the USDA are forecasting to remain at similar levels for most of 2008.
2. Extremely large short interest in the stock - forcing a large volume of purchases of the stock due to the expectations of weaker earnings which have now been blown away.
3. Large and stable volume of stock held closely by the CEO and insiders, giving more floor to the stock price.
4. Increasing demand for exportation of eggs - strengthened by the weak U.S. dollar.
5. Operational performance has been good, with large increase in gross margins.
6. Likely return of many short sellers from a holiday week - who will now be buying back stock - will make next week a timely entry point into the stock.

Although as with everything in life your investment portfolio should not put all your eggs into one basket, this is a stock that you can be looking at purchasing at the start of trading next week.

The Tech Farm: Overbought, Oversold, and Oscillators

Just ran across another blog with a lot of information and links ... if you're skipping around you might find a topic or two of interest:

The Tech Farm: Overbought, Oversold, and Oscillators

Dec. 17 Stock Buy: Intercontinental Exchange Inc (ICE)

December 17, 2007 - Stock Recommendation: Intercontinental Exchange Inc (NYSE:ICE)


When the stock market is lacking direction and headlines knock the general market lower, stocks that buck the downtrend are potential new leaders to consider adding to your portfolio. They are buoyed even when the market is down. Find one with good fundamentals and reasons to buy, and you have stock that can outperform in a choppy market. One for you to examine more closely is Intercontinental Exchange Inc., ticker ICE (NYSE closed at $185.73 on 12/14). The stock rose $4.91 or up 2.72% on Friday when the DOW and S&P500 were down 1.32% and 1.37%, respectively.

[ICE operates an electronic futures and over-the-counter exchange for energy and agricultural commodities, and in January 2007 purchased the NYBOT to increase its presence.]

There was no major moves pushing ICE shares higher on Friday. Thursday evening the company announced they will move to an all-electronic futures trading platform, eliminating live outcry trading in the pits at the end of February. They may recognize some personnel cost savings from this move, but since most of the trades were already done electronically, it was not a major announcement. Long-term they might be able to reduce leased spaces for pits, but these are all under current leases that run several more years. The shares of ICE broke through their 52 week high on Friday, ushering in new territory for the stock.

Why the strong performance?

Intercontinental Exchange has been on a huge earnings upswing:

• 2005 EPS = $0.98
• 2006 EPS = $2.40
• 2007 EPS = $3.33 (Q4 estimates)
• 2008 EPS = $5.04 (estimates)

The stock sports a PE of 56 - towards the higher end of its PE range of 40-60 over the last year. But ICE has also been very successful at increasing its revenue each year as well, so the earnings increases have come from higher gross revenues, not just squeezing more profits out of same sales. These are what I call "good" earnings increases because revenue numbers are harder to manipulate than bottom line profits. These top line revenue numbers have also been impressive:

• 2005 - $156 Million
• 2006 - $314 Million
• 2007 - $570 Million (Q4 estimates)
• 2008 - $786 Million (estimates)

Intercontinental Exchange has been a strong recent stock, with a high Relative Strength and peer companies in the Financial Services Industry that have also been strong performers, companies like Chicago Mercantile Exchange Group (CME) and Mastercard (MA). The strong recent performance in 2007 of stocks such as these have put ICE on more institutions buying screens, and the stock has been strongly supported in recent months. Look to see continued sponsorship of the stock in the coming months.

The Fundamental Reason to Buy ICE

The underlying reason that I am bullish on Intercontinental Exchange Inc is that their core business surrounds futures and options trading on energy and agricultural commodities. The volatility in the energy sector has helped power the increased trading and volumes, driving ICE revenues up with them. As markets become more volatile, trades become much more active as producers and users hedge their own business interests and trader/investors try to make money in the volatility and trades. Energy prices will likely remain volatile, continuing to support the futures market trades that ICE operates.

The other primary commodities that ICE operates in is agricultural products. I believe these markets will become even more volatile in 2008, powering a higher move in ICE shares. The headlines through 2007 have supported this trend. Look at the major fertilizer companies (CF, MOS, POT) that have powered to new highs in 2007 due to the increasing demand for their products in the agricultural market. John Deere (DE) business is booming with record sales. Smart Money magazine just listed one of their major trends for 2008 as being increased demand for meat worldwide as the living standards improve, and corn and soybean crops as being major benefactors because of the feed requirements. Smart Money even listed Bunge (BG) - a play on grains, oilseeds, and fertilizers - as one of their stock picks for 2008, and John Deere too.

All of these moves plays into the core business of ICE as well. That's the play we're looking for in the stock. Generating more revenues from increased volatility in the commodities markets. Breaking into new 52-week highs and announcing all-electronic trading ahead of expectations are just timely bonuses for buying ICE at this level.

The overall market on Monday and Tuesday could be rocky from the inflation fears from Friday, but by Wednesday we should have that shaken out. You may want to look at ICE to see what direction it will take on Monday before taking your position, or buy in with only 1/4 to 1/2 of your target holding, adding shares on any weakness through mid-week.

As always, please feel free to let me know your thoughts and comments!

Dec 12 Stock Pick - Jacobs Engineering Group

December 12 - Stock Selection Jacobs Engineering Group (JEC)

Although financial and banks stocks were weak in today's trading, the general market rebounded slightly from the disappointing Federal Reserve meeting on Tuesday. Due to the Fed response and Wall Street's luke-warm reception to the language issued looking forward into 2008, it is wise to look for stocks that are less dependent on both the U.S. economy and specifically reliant on large and rapid Fed rate cuts. My recommendation: Jacobs Engineering Group Inc. (JEC).


JEC is a construction and engineering firm based in the United States with projects underway around the world. Because a large portion of their revenue is outside of the U.S. the Federal Reserve and U.S. economy are not as heavy influence on JEC. There is a lot to like about this stock and its fundamentals and business, but that due to its P/E of 40 it is also a little bit of a momentum play. [disclosure - on Dec 6th I purchased January Call options on JEC at $90 strike price] Here are some positive notes on the company:

• Earnings have been steadily growing each quarter. Here are the last two years:
• Q1 2006: $0.36
• Q2 2006: $0.37
• Q3 2006: $0.42
• Q4 2006: $0.46
• Q1 2007: $0.51
• Q2 2007: $0.55
• Q3 2007: $0.61
• Q4 2007: $0.68
• Each of these quarters they have beaten earning estimates from Wall Street, usually by $0.03 - $0.04.
• The PE has been slowly expanding through 2007
• JEC's relative strength has been higher than its peers in recent weeks
• The stock held up nicely yesterday when the market was down big, showing strength, and bounced higher today - up 3.7%
• The stock is breaking into new highs after testing its 50-day moving average, showing technical strength
• Management is executing their operations well - sales increased from $7.5 billion to $8.5 billion in 2007 while increasing their gross margin this quarter (y/y) by 180 basis points - indicating they are not sacrificing margin to increase sales
• Management report in 4Q that their backlog of existing orders continues to expand - to $13.6 billion. This is a 23% increase in sequential quarters and a39% increase year over year.
• Analysts are continuing to raise their earnings estimates
• JEC offers an alternate choice to other current popular stocks in the segment such as Foster Wheeler

Overall, Jacobs Engineering is a steady performer whose predictable growth and strong order backlog, worldwide revenues, and relative strength make it a good buy at this level and on any pullbacks. The stock does sport a valuation higher than its peers, which although currently deserved does make the stock price susceptible to broad market corrections or if management should stumble. For these reasons, this is a holding that should be monitored closely for good entry points on pullbacks and for any heavy selling that would indicate a breakdown in its momentum.

Fed Lagnuage Problems, Short SBUX Position

Federal Reserve Language LetDown

I was only 1/2 right on the Fed's meeting today. Although I was right in expecting only a 25 basis point cut, I thought the Fed would issue language accompanying their statement that they stood vigilant and ready to do more - and quickly - if needed. Instead, they seemed to be more cautious than prepared, and this more than the lack of a 1/2 point cut weighed heavily on the market. Tomorrow may provide some more pressure to the market.

I believe however, that the Fed is going to have to ease more in early 2008, probably even at their January meeting. The question of course is what the market sentiment will be in the coming weeks. Look for pullbacks on strong companies to add positions to, but remain cautious about the price points you are willing to pay. There is still no confidence for a general market rally, and more defensive positions (medical, beverages, consumer goods) remain a smart place to ride out the uncertainty. The other opportunities are to look for stocks you can profit in from shorting.

Two Stocks To Consider Shorting, SBUX & MRVL

In fairness and full disclosure, I'm not an expert in taking short positions, which I believe are hard to pull off. But here are two stocks that I am watching closely: Starbucks (SBUX) and Marvel Technologies (MRVL). Both have also had increasing short positions growing, although neither one to extreme levels. But an increasing short position as the percent of float would be a cautios indicator to watch for any potential short squeeze. I continue to watch MRVL ($14.82, short interest 4.8%) and may short this stock if I see continued weakness. But I already have shorted SBUX ($21.89, short interest 3.7%) with 1/2 a position and am considering adding to it. Here's why.

In November, Starbucks reported that their store traffic fell at same-stores for the first time in their history. And they forecasted earnings for the current quarter below Wall Street's consensus estimates. That's bad news. Dropping sales, and downward guidance. SBUX has a strong institutional ownership - 62.3% of shares. Institutions wanting to unwind these positions, as many will want to do in the next week or two because of end-of-year window dressing, will create downward pricing pressure. The stock's chart shows why funds might want to clean SBUX off their holdings:


The stock is at a 52 week low, but there isn't anything exciting to point to for a quick pick-me-up. Goldman Sachs downgraded the stock yesterday, and McDonald's premium coffees have been successful and raised some questions about the sticking power of Starbuck's $5 cup of joe. If the economy cools and business travel falls, Starbucks will feel some impact since the company has prominent retail locations in major airports and close proximity to hotel chains.

Out of 26 analysts covering SBUX, there are still 6 rating the company a BUY and 3 a STRONG BUY. I think it is more likely for some of these 9 analysts to issue downgrades than any of the others issuing upgrades, providing more negative news.

All of this makes me think we haven't seen the bottom in SBUX and it's looking capable of turning south of $20. I will likely add to my short position on any short term strength the stock shows. Like all shorting strategies, these are risky positions to take only if you have the experience and portfolio to accept losses if the stock rallies and moves against you. But I for one am betting that's Starbuck's is turning into one cup of iced coffee.

Dec 10 Speculative Stock Selection

Stock to Watch on Tuesday December 11, 2007

Mindray Medical International LTD (MR:NYSE) - Mindray Medical International (MR) is a Chinese manufacturer of medical devices, with products in patient monitoring, diagnostic lab equipment, and ultrasound imaging. MR recently (June 2007) received FDA approval for Hypervisor VI, a central monitoring system, and for its differential hematology analyzer. In addition, they have several more products in the pipeline for next year.

Bear Sterns initiated coverage on the Mindray Medical today with an Outperform rating.

There are few analysts covering the stock - only four - which allows for more upside potential with additional coverage and buy recommendations. The last three quarters MR has beaten estimates by $0.03, $0.03, and $0.01 per share. Earnings in the recent quarter came in at $0.18 per share, with mean estimates for Q4 of $0.20 per share. The three-year earnings have been increasing at 59% per annum, and the stock currently sports a PE of 70 with todays 7.7% price gain. MR carries a high gross profit margin on its products - 55% - beating most of its competitors. Last quarter revenues were up 67%. The stock is not cheap, but is growing rapidly and should increase its visibility and coverage.

The stock is on my watchlist because it has just rebounded from a pullback that has now accelerated the stock price back up to just below its 52-week high (45.19). Technical traders will be looking at the stock on Tuesday to see if MR can break into new ground signalling a strong technical buy signal.



MR is a speculative play - it's in China, it's followed by few analysts, and trades at a high P/E. But the stock has big upside potential, and could be an interesting play for the coming three months.

Dec 10, 2007

Dec. 10 - The Pending Home Sales Report released today showing a small bump up helped to buoy the market today. Most market watchers are keeping a close watch on tomorrow Fed meeting, which is expected to cut interest rates at least a quarter point. Trading volume was a little light today ahead of the Fed meeting.

Friday's report with a stronger-than-expected Jobs Report makes me think that the chances of the much-hoped for 1/2 point cut in interest rates much less likely. I expect the Fed to cut on 25 basis points while keeping their language stressing that they are watching indicators closely to ease fears that the Fed isn't responding to recessionary fears fast enough.

The market at the present time, although showing some traction and strength recently, remains unstable. I am being cautious with entering new positions until a little more visibilty on the direction of the macro influences are available.

Notwithstanding this caution, there are several stocks of particular interest that I am watching closely. I will post more this evening on one of the more speculative plays that made a big move today.