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The bet against chicken producers amid stock surge

Poultry producers' shares have surged this year on a mix of pricing power and strong demand, but investors are betting that this trend will reverse.

Short interest in a handful of poultry stocks has jumped as of Nov. 14, according to data from Factset—up 53 percent for Pilgrim's Pride stock, 31 percent for egg distributor Cal-Maine, nearly 21 percent for Sanderson Farms and 4 percent for Tyson Foods.

Chicken farm
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The increase in short interest in the names follows a spike in their stock prices. Year to date, shares of Pilgrim's Pride are up 103 percent, Cal-Maine 40 percent, Sanderson Farms 24 percent and Tyson Foods 23 percent.

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These poultry names have benefited this year as high beef prices led shoppers to walk to the chicken aisle instead.

"Economics 101 tells you it's a bit of a substitution effect for protein. ... It would be safe to assume that if the price of beef comes down, chicken might be less in demand, but again it's hard to forecast that," Markit analyst Simon Colvin said in a phone interview.

A recent Markit report details what could be behind the rise in poultry producer short interest.

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"In an environment where input costs have come down but selling prices have increased," this could "indicate investors are anticipating an increase in supply and associated pricing pressure after a recovery in supplier pricing power," according to the report.

If poultry prices are expected to fall, producer pricing power could reverse—a "scenario (that) could be devastating for marginal producers and may be behind the recent shorting activity," the report adds.

Indeed, the USDA expects broiler prices to moderate somewhat during the second quarter of next year.

"That's because we're calling for higher production growth in 2015, which would put a downward pressure on prices," USDA economist David Harvey said.

Still, amid the runup in short interest, 83 percent of analysts have a "buy" or "overweight" rating on Tyson Foods stock, with Wall Street expecting 17 percent future upside. Meanwhile, 40 percent of analysts have a "buy" or "overweight" rating on Pilgrim's Pride shares.