Wednesday, July 3, 2013

KKD: A doughnut is more than a doughnut

Updated 8/30/2013: KKD gave a bull signal on Aug. 30. It gapped sharply to the downside at the open and in the first half hour traded as much as 8.7% below the prior day's close following a negative 14.1% earnings surprise.

My bull position in KKD was structured as short vertical spreads sold for credit. They expired Aug. 16 without value and have since been on the shelf waiting for a fresh buy signal that would allow me to roll them to position with a later expiration.

That buy signal never came, and so the Aug. 30 decline became a signal to calculate my profits and remove KKD from the shelf.

I held KKD for 44 days, and in that time the shares rose 11.8%, or 97.7% annualized.

The options produced a 17.7% yield on risk, or 146.8% annualized.

Krispy Kreme Doughnuts Inc. (KKD) has been on a sugar high, stairstepping upward toward a swing high, $19.12. Tuesday's break above the 20-day price channel and subsequent high produced a bull a signal that was confirmed in early trading today.

The break also initiated a five leg up for the stock, which has been rising since the markets began recovering in early 2009 from the Great Recession crash.

Normally before moving on to a deeper analysis of a stock I would give it a few hours to trade to see if it truly was confirming a signal. But this is not a normal day. The markets close at 1 p.m. Eastern and any trader who hopes to ply his or her trade must be an early bird.

KKD's chart shows such a bullish bias that an early start, in my book, poses little risk.

This is KKD's fourth bull signal since the present uptrend began in June 2012. The three completed signals were all profitable, with an average yield of 25.5% over 53 days.

Four symbols survived my preliminary analysis last night. (See my posing "Wednesday's Prospects".)

The most liquid of them, TWX, had a looming earnings announcement pop up on the calendar, running afoul of my 30-day exclusionary rule. I tossed KAR because its win/lose yield spread was the lowest of the three remaining symbols.

SPWR has good odds and an acceptable chart (and as a solar cell company a far more compelling backstory than KKD's doughnuts).

However, its break on Tuesday above $21.83 is shy of the prior higher high at $23.76. Rather than jump in now, I'm adding SPWR to my watch list pending a true breakout.

Krispy Kreme,  headquartered in Winston-Salem, North Carolina, operates nearly 700 stores in 21 countries under the mission statement, "To touch and enhance lives through the joy that is Krispy Kreme", and the vision statement, "To be the worldwide leader in sharing delicious tastes and creating joyful memories."

Gertrude Stein wrote that a "rose is a rose is a rose". But for Krispy Kreme, obviously, a doughnut is more than a doughnut.

Analysts are in aggregate neutral about KKD's prospects, giving it an enthusiasm rating of zero, despite the company having a product that holds a place in the American culinary heart second only to pizza.

Certainly fried dough and sugar have proven to be a money-maker for Krispy Kreme, which reports return on equity of 14% with debt equal to only 9% of equity.The company has been profitable 11 of the past twelve quarters, and the losing quarter was way back in 2010.

The 1st quarter of the year tends to be Krispy Kreme's earnings peak, and 1st quarter earnings have increased year by year since 2010.

Institutions own 69% of shares. The price stands well above parity; it takes $2.66 in shares to control a dollar in sales.

KKD on average trades 1.4 million shares a day and surprisingly supports a good selection of option strike prices with three-figure open interest. The front-month at-the-money bid/ask spread  on calls is fairly tight, at 5.3%.

Implied volatility is at 39% and has been declining since late May. It is in the lower half of the six-month range.

Options are pricing in confidence that 68.2% of trades will fall between $16.80 and $21.04 over the next month, for a potential gain or loss of 11.2%, and between $17.90 and $19.94 over the next week.

Today's trading in options is leaning toward puts, which are trading at 240% of their five-day average volume. But calls aren't far behind, at 200% of their average.

The fair-price zone on today's 30-day chart runs from $18.85 to $19.02, encompassing 68.2% of trades surrounding the most-traded price, $18.85. Note that this is less than an hour into the truncated trading day and so is really not enough data to draw conclusions about very near term momentum.

Krispy Kreme next publishes earnings on Aug. 19.

Decision for my account: I've opened a bull position in KKD, structuring it as a short vertical spread expiring in August, short the $18 put and long the $16 put. The position is profitable at expiration down to 7.7% below the entry price. Maximum profit is 17.7%. The leverage is 1.7:1.

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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