(FORTUNE Magazine) – Wall Street is having a hard time digesting the news that Krispy Kreme Doughnuts' business is slowing down because of low-carb diets. But here's the 6,000 dozen question: Is the company's slowdown just a little Atkins hiccup? Or is it a bigger burp that suggests other, deeper problems at the Winston-Salem doughnut company?

As you may recall, in late May Krispy Kreme CEO Scott Livengood announced the company's first loss since going public in 2000 (this because it was writing off the cost of shutting down a bread company it had bought), and said it would open only 100 stores this year, vs. a previous forecast of 120. The company had warned investors of this earlier in the month, and its stock had tanked. KKD now sells for $20 a share, down 60% from its all-time high of nearly $50 last summer. So exactly how did this "get 'em while they're hot" company become so cold?

Well, Krispy Kreme has long been a favorite target of short-sellers--the percentage of its shares available for trading owned by shorts was over 25% in April. Not only did the shorts make out when the stock plunged after the company's warning, but they were quick to scoff at the notion that Krispy Kreme's problems were solely the fault of the late Dr. Atkins. A diet as a beard, they claimed. The shorts say in fact the company has been overly aggressive in expanding. They point to its strategy of selling its doughnuts in supermarkets as cannibalizing its stores. They complain that transactions with large franchisees have been complex and, some suggest, inappropriately skewed so as to benefit the company's earnings. To sum up, read this from the requisite lawsuit filed by the infamous Milberg Weiss law firm: "Rather than cultivate a steady customer based [sic], the Company instead attempted to capitalize on Krispy Kreme's 'fad appeal' and adopted a business model and strategy for increasing sales that was predicated on the perpetual addition of new stores and the hyping of the Company's entry into new markets.... "

So are the shorts right? Well, they aren't entirely wrong. First off, it should be pointed out that KKD's stock was flying above the clouds and getting a bit close to the sun anyway. (I should also point out that less than a year ago FORTUNE ran a cover story entitled "How Krispy Kreme Became America's Hottest Brand." Lately folks have been reminding me of that story--probably because I wrote it.) Krispy Kreme also made the misstep of buying that bread company early last year, as the low-carb craze was kicking in. And Dunkin' Donuts, owned by Britain's Allied Domecq, seems to have new life and recently inked a deal to open stores in Wal-Marts. To be sure, Atkins mania has to be cutting into the business. But when you add up all of the shorts' charges, you can't help but come to the conclusion that Krispy Kreme has become a bit aggressive--particularly over the past year. It's what happens when a company feels compelled to please Wall Street.

Some say this is just one fad --Krispy Kreme--running headlong into another fad--Atkins. But Krispy Kreme, which has been around since 1937, is more than just a fad, and for that matter the same is probably true with carb counting. What's really going on here is a story of a stock that got way ahead of itself, and a company that perhaps began to believe too much in its own hype. By the way, the shorts haven't abandoned the stock yet. As of mid-May, the short position in KKD's stock had actually climbed to 30%. It's now up to Livengood and company to prove them wrong. --Andy Serwer