Cal-Maine: A Peter Lynch Pick

04/06/2016 7:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

John Reese, founder of, assesses stocks based on the strategies of Wall Street's most legendary investor. This recommendation earns a 100% rating based on the "p/e growth" model of Peter Lynch.

Cal-Maine Foods (CALM) is a producer and marketer of shell eggs in the United States. The company markets its specialty shell eggs under brands, such as Egg-Land's Best, Land O' Lakes, Farmhouse and 4-Grain.

It also produces, markets and distributes private label specialty shell eggs to several customers.

The Peter Lynch methodology examines the P/E (6.95) relative to the growth rate (22.27%), based on the average of the 3, 4 and 5-year historical EPS growth rates, for a company.

This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for CALM (0.31) is very favorable.

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remains below $40.

Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. CALM's P/E of (6.95) is considered acceptable.

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive.

Inventory to sales for CALM was 10.14% last year, while for this year it is 9.28%. Since inventory to sales has decreased from last year by -0.86%, CALM passes this test.

This methodology would consider the Debt/Equity ratio for CALM (3.30%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years.

This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable.

The EPS growth rate for CALM is 22.3%, based on the average of the 3, 4 and 5-year historical EPS growth rates, which is considered very good. The Lynch model would consider CALM a "fast-grower".

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By John Reese, Founder of

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