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Favorite Stock: KKD
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June 12, 2001: 12:24 p.m. ET
There's no getting around Krispy Kreme's great run, one strategist says
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NEW YORK (CNNfn) - Krispy Kreme Doughnuts Inc. stock hasn't gone stale despite its run-up since going public last year, according to Bernie Schaeffer, Chairman and CEO of Schaeffer's Investment Research.
Schaeffer specializes in stock and stock index options. By parsing this complicated market -- in which traders buy the right to buy and sell securities at a fixed price before a certain date -- Schaeffer divines sentiment, or the market's collective attitude toward a stock.
Though seemingly counter-intuitive, negative sentiment is often a sign a stock is headed higher. Optimism signals a stock might fall.
That's part of the reason Schaeffer likes Krispy Kreme, the doughnut maker that went public 14 months ago. In the last year, a period when the Nasdaq composite index lost half its value, Krispy Kreme (KKD: Research, Estimates) shares tripled, causing options traders and short sellers to bet the stock is now due to fall.
Schaeffer forecasts just the opposite.
What draws you to this stock?
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Bernie Schaeffer | |
My general approach is to recommend stocks with strong technicals and strong fundamentals accompanied by skeptical or negative investor sentiment, with the latter used as an indication that there is still money on the sidelines to support further gains in the stock.
So how skeptical are traders about Krispy Kreme, whose shares are now 145 percent above their 52-week low?
There are 5.8 million shares in short interest, equal to about 20 percent of shares outstanding. And in the options market there are more open put positions than call positions. Heavy short interest and heavy put positions can fuel additional gains as shorts are forced to cover.
Are there reasons that all the people betting against Krispy Kreme will be wrong?
The company reported very strong fourth-quarter earnings that almost tripled and exceeded Wall Street expectations by nearly 20 percent. Krispy Kreme has aggressive expansion plans, including direct competition with Dunkin' Donuts. It's one of the few growth stories out there.
What are the particular risks associated with Krispy Kreme?
The company could see a slowdown in growth and a slowdown in same-store sales. Valuation is also an issue, with a price-to-earnings ratio of around 100. 
* Disclaimer
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