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Why 15% Drops Aren’t Always a Sign to Sell Stocks

These examples show how strongly stocks can bounce back after 15% dips

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Doughnut Mania

krispykreme185Krispy Kreme (KKD) dropped 21% April 1, 2011 on an unexpected Q4 loss of two cents per share — six cents worse than analyst expectations. By the end of the day, KKD stock was trading at $5.56 per share. A similar drop occurred  on Dec. 3 of this year when the doughnut shop announced 2015 EPS guidance between 71 cents and 76 cents, less than the consensus estimate of $0.77.

With same-store sales in the third quarter up 3.7%, its 20th consecutive quarter with positive comps, investors overreacted to the news. Finally, in late summer, its stock dropped 15% August 30 on earnings that were two cents short of analyst expectations. With KKD’s pricey valuation any excuse will send its shares down. That spells opportunity.

CEO Jim Morgan has performed a first-rate turnaround since jumping from the boardroom into the CEO chair in January 2008. A director since 2000, Morgan has brought a sense of focus and direction to the company and shareholders have benefited mightily from his leadership. Since he took charge, its stock is up over 1,000% through December 18 and that’s including the 20% drop in early December.

The earnings news isn’t nearly as bad as Jim Cramer believes it is. Investors who were holding in August when its shares dropped below $20 should still be holding today. And if they were smart they would have bought some more then and again in early December. This is a company whose stock has demonstrated a bounce-back quality. It will be above $25 in no time.

Article printed from InvestorPlace Media,

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