Too Rich at Krispy?

A big favorite of short-sellers these days--outside of their plum targets in techs--is Krispy Kreme Doughnuts (KREM ). Operating some 180 stores (of which 90 are franchised) in 28 states, it has become famous for its sweet, superrich pastries, especially its popular "original glazed." The shorts aren't dazzled, but they could be wrong. And if they are, they would have to cover their huge short positions. The open interest in put options on Krispy's stock far exceeds the call positions. That means the bears are betting that the stock will crash. The 2.5 million shorted shares equal nearly 10% of Krispy's shares outstanding. But that's just dandy for options expert Bernie Schaeffer: Although still bearish on the market, Schaeffer is strongly bullish on Krispy. "As a contrarian, I like the idea that the shorts are all over Krispy Kreme, ignoring the company's strong fundamentals and technicals," says Schaeffer, CEO of Schaeffer's Investment Research and editor of The Option Advisor newsletter. Earnings almost tripled in the fourth quarter, beating analysts' estimates by nearly 20%. Krispy expects to earn 69 cents a share in the year ending Jan. 31, 2002, vs. analysts' estimates of 65 cents. Krispy, which will soon move to the Big Board, went public on Apr. 5, 2000, at split-adjusted $10.50 a share. Schaeffer sees Krispy, now at 36, doubling in a year.

The bears contend that Krispy's price-earnings ratio of 52 is too rich. And they expect sales, which hit $300 million in 2001, to fall short of the projected $367.4 million in 2002. John Ivankoe, an analyst at J.P. Morgan Chase, says the "stock continues to be driven by better than expected comps, store growth, and earnings." Krispy is "appropriate for longer-term investors," he says, and is now priced at an "attractive entry point."

By Gene G. Marcial

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