A ‘Sweet’ Addition to Your Portfolio

01/19/2007 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Technical ace Bernie Schaeffer 'sweetens' his recommendations with the once-high-flying, but now-beaten-down shares of this rapidly-expanding doughnut maker. Rumored to be receiving some possible buyout attention from possible suitors, the shares are trading at an attractive level...

"According to Hoover's, Krispy Kreme Doughnuts (KKD NYSE)--popular for their glazed doughnuts that are served fresh and hot out of the fryer--operates a chain of almost 300 shops and about 90 smaller format satellite locations throughout the US and in eight other countries. In addition to its original glazed variety, Krispy Kreme Doughnuts serves cake and filled doughnuts, crullers, and fritters, as well as hot coffee and other beverages. About two-thirds of the company's stores are franchised. Krispy Kreme Doughnuts also markets its doughnuts through grocery stores and supermarkets.

"Recently, the company has started opening new retail store locations in the United States, providing evidence that the concept and brand are healthy. Recently, a rumor arose that Krispy Kreme might be a takeover target by a private equity firm. Any buyout offer could boost the company's stock price.

"Technically, Krispy Kreme Doughnuts is a solid performer, gaining more than 190% since hitting a near-term bottom in October 2005. The stock is rallying from strong support at its 50-day moving average, which provided support in both October and December. The shares are now holding above the October seven-month high of 10.75.

"Throughout this march higher, the stock has relied on the support of its 10-month moving average. The last time the equity finished a month below this trendline was December 2005. Although the stock is in an uptrend, the speculative options crowd is firmly entrenched in the bearish camp. Krispy Kreme Doughnuts' Schaeffer's put/call open interest ratio of 1.61 is higher than 95% of those taken during the past 52 weeks.

"Fuel for a short-covering rally is huge, as 30% of Krispy Kreme Doughnuts' float is sold short and it would take 40 days to buy back these shorted shares at the firm's average daily trading volume. Analyst coverage on the Krispy Kreme Doughnuts is sparse, as only two follow the firm (with one being a "strong sell" rating). This lack of coverage affords ample opportunity for fresh positive coverage, which could push the stock higher.

"The end result of Krispy Kreme Doughnuts' strong performance and the Street's bearish sentiment is a Schaeffer's Equity Scorecard rating of 9.0 out of a possible 10. This score suggests that the stock should find less resistance to a move higher. Buy to open at a maximum entry price of $ 11.52 or less. The target price is $14.50 and the stop-loss price is $9.95."

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