Krispy Kreme Doughnuts (KKD) reported its third quarter earnings on Monday after the close of trading. The company announced earnings per share 16 cents for the third quarter, which was in line with analyst estimates.
The EPS figure was higher by 33% from the same quarter last year, but the revenue side was more disappointing. Top-line revenue came in at $114 million versus the estimated $117 million despite sales being up 7% on a year-over-year basis. The company also adjusted its 2014 and 2015 fiscal year outlook somewhat, but not in a major way. Coming into earnings, the company was trading at a lofty 63 times last year’s earnings and 26 times next year’s estimates. After Tuesday’s selling, KKD stock fell down to a P/E of 52.
So, after Tuesday’s 20% haircut in the stock, where does this leave the stock when looking through the lens of technical analysis?
First and most obviously, on the two-year logarithmic chart, Tuesday’s selling snapped KKD stock’s November uptrend, in a big way. From this point of view, the stock’s medium-term chart is simply broken, and risk/reward does not favor buying the stock, at least not yet. Big downward gaps, such as what we saw in KKD on Tuesday, often bring plenty of momentum that continues for several days or even weeks, which is to say that KKD likely has more downside to test before a bounce attempt could occur.
Depending on investors’ time-frames, Tuesday’s price action dictates more or less action on their part. Tuesday’s price action should at the very least get investors to sell/part of any open long positions, while traders looking to buy the stock are better off in a wait-and-see mode until the stock can establish some sort of slowing down of downside momentum.
On the daily chart, Tuesday’s violent plunge sliced right through the stock’s 100-day simple moving average (blue line) and took KKD down to its first area of support, which is marked by the blue box. This area of support is made up of the September bottoming process and supported at the lower end by the stock’s rising 200-day simple moving average, around the $18.50 area.
So, while downside momentum for KKD likely is still too strong in coming days to play the stock from the long side, a first area of interest to watch for the stock to begin a constructive consolidation phase is not too far away. So, be patient with KKD for now — because a patient trader is a more profitable trader.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.