In the most recent edition of Barron's, fund manager Scott Black touted shares of Cal-Maine Foods (NASDAQ: CALM), the country's largest egg producer, as a stock worth buying. The company generates a return on equity of over 30%, and Black said that at just over 5x earnings, the stock is extraordinarily cheap. When the market revalues Cal-Maine at "just eight times [next year's estimated] earnings, you've got a $38.50 stock." Shares of CALM, which closed Friday at $22.90, were up to $24.86 by Wednesday morning.
I'm familiar with Cal-Maine, having been introduced to the company more than a year ago when it was the focus of a presentation at the Boston College Investment Club. Last summer, I spoke with the company's CFO, Tim Dawson, who gave me a much better understanding of the egg business. Though I came away convinced that Cal-Maine is in very capable hands, I believed then -- as I still do now -- that the stock is not a buy. Here's why.
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