Call it a crazy hunch (because that's all it is), but I'd be a buyer of Krispy Kreme Doughnuts (NYSE:KKD) today in the shadow of the stock's 14% selloff. KKD shares are down as a result of a lowered profit forecast for 2014, but if my 15 years in graying hair count for anything at all, this smells like a one of hundreds of cases where the market over-reacted to admittedly not-great news, only to watch the stock bounce back once the dust started to settle and reality set in.
On the off chance you're reading this and have no idea what I'm talking about Krispy Kreme Doughnuts lowered its full-year per-share earnings outlook on Tuesday. Originally the company was looking for income of 73 cents to 79 cents. Now the company expects to turn a profit of between 69 cents and 74 cents per share of KKD. That's about a 7% decline between the midpoint of the original range and the new one, sparking a non-commensurate 14% selloff for the stock.
The exaggerated selling alone would be a reason to step into KKD here. Prior to today the market was willing to pay a forward-looking P/E ratio of 25.0 to own shares. After today, the market is only willing to pay a forward-looking P/E of 22.5 to hold a stake in Krispy Kreme. Granted, the fallout from the contracted outlook can and should play a factor in how much traders are willing to spend to own the stock, but from a purely mathematical standpoint, things don't fully jive.
There's a bigger, ambiguous X-factor in play here, however. I believe Krispy Kreme Doughnuts is putting out some lowball numbers to ensure relative success for the coming four quarters. While the organization is facing legitimate struggles, it seems unlikely to me KKD wouldn't handily top last year's trailing per-share profit of 61 cents when it's managed to crank up its bottom line from 11 cents in fiscal 2011 to 31 cents in 2012 to 47 cents in 2013 and to last year's 61 cents. Yes, the company will hit a saturation point sometime. I just don't think it's done so yet, however - I think it should be able to sustain its growth pace through this year (fiscal 2015). I have a funny feeling we're being sandbagged. That's a good thing though, in the end.
That's just one man's opinion, however. Even I don't get married to all my ideas. I just know the market's strongest, blindest reactions are often reversed, and reversed rather quickly.
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