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(B)(N) KKD Krispy Kreme Doughnuts Incorporated

June 5, 2013

Drama. National Doughnut Day is coming up (click on June 7 below) and the markets are taking an early coffee-break, waiting for some new anxiety to spin their tales. However, we’re always on the look-out for an honest buck regardless of the “markets” and thought that we, too, should check out the coffee & donuts that fuel the early mornings and overtime of working America.

National Doughnut Day

National Doughnut Day June 7
Courtesy: Krispy Kreme

They’ve all been in the Perpetual Bond™ for years (please see the Exhibits below, Red Line Stock Price (SP) above the Black Line Risk Price (SF), and for no other reason) and our headliner is the smallest of the three (including Dunkin’ Donuts and Tim Hortons which are of a similar size) and it grew much faster than its customers this year, and much, much faster than its friends in the same business.

Most analysts will say that it’s because the earnings growth (EPS) was good quarter-after-quarter in 2012 and as expected (The Street, May 29, 2013, Great Donut Debate Hits Delicious Dilemma).  But that doesn’t explain anything about the extraordinarily “crispy” stock price – from $6 to $18 and a $300 million company to a $1 billion company in less than a year- or how the alleged “earnings” growth is going to support that price in the future, or shall companies forever live hand-to-mouth, quarter-to-quarter, on the expectations of analysts and pundits? And, of course, Krispy has been in business for more than 70 years – where’s the surprise? Please see Exhibit 1 below.

It should be obvious that the stock price will go up only if there are more buyers than sellers (usually money-wise but it could be effected by the relative numbers of  buyers and sellers if there’s money somewhere), and down otherwise – all stock prices begin and end at zero – and a “numerate motivation” is only one of many factors and P/Es and EPSs get at most a glancing look because they don’t foretell the future, or even next week, and there’s no special content to move markets other than a simple fact culled from the past and a wink and a nod from some analysts. It’s the tail and it doesn’t wag the dog.

In the case of Krispy Kreme, which only has a market capitalization of $1.1 billion at the current $17, there are less than twenty institutions that own 50% of the stock, in total, and only eight that own a quarter of it; and then there are two private investors that each own 10% or more than 6 million shares each. So, who is buying the coffee, today, so to speak, and from whom shall they buy it?

Small investors, and mom & pop, who might be impressed by the market pundits, P/Es and all that, and their own opinion, get only the market price; the institutions, however, need to know who has them in millions of shares, and they’ll work something out. The problem, of course, is who will buy them from them?

And that’s where you come in Mr. Analyst, Mr. Pundit, and Mr. Tout.

Exhibit 1: (B)(N) KKD Krispy Kreme Doughnuts Incorporated – Risk Price Chart

(B)(N) KKD Krispy Kreme Doughnuts Incorporated

(B)(N) KKD Krispy Kreme Doughnuts Incorporated

Krispy Kreme Doughnuts Incorporated is a branded retailer and wholesaler of doughnuts, complementary beverages and treats and packaged sweets. The Company’s shops are operated under the trademark doughnuts such as Krispy Kreme and Original Glazed.

(Please Click on the Chart to make it larger if required.)

From the Company:  The company owns and franchises Krispy Kreme stores and as of February 3, 2013, operated 97 company shops, 142 domestic franchise stores, and 509 international franchise shops. It also produces doughnut mixes and doughnut-making equipment. The company was founded in 1937 in Winston-Salem, North Carolina, and currently has 2,800 employees.

Exhibit 2: (B)(N) DNKN Dunkin’ Brands Group Incorporated – Risk Price Chart

(B)(N) DNKN Dunkin' Brands Group Incorporated

(B)(N) DNKN Dunkin’ Brands Group Incorporated

Dunkin Brands Group Holdings Incorporated is in the business of franchisor of quick service restaurants serving hot and cold coffee and baked goods, as well as hard serve ice cream.

(Please Click on the Chart to make it larger if required.)

Exhibit 3: (B)(N) THI Tim Hortons Incorporated – Risk Price Chart

(B)(N) THI Tim Hortons Incorporated - June 2013

(B)(N) THI Tim Hortons Incorporated – June 2013

The Tim Hortons Incorporated business is to develop and franchise quick-service restaurants that serve food, including coffee, other hot and cold beverages, baked goods, sandwiches, soups and other foods products.

(Please Click on the Chart to make it larger if required.)

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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