I have covered Krispy Kreme Doughnuts‘ (KKD) story throughout 2015, and, for the past few years, I have been bearish on KKD stock.
Krispy Kreme Doughnuts will announce earnings after Wednesday’s close this week, and Wall Street is looking for a profit of 22 cents per share on revenue of $136 million.
In March, KKD matched analysts’ expectations of 17 cents per share but missed on revenue. In the previous two quarters, Krispy Kreme Doughnuts missed estimates by 1 cent and 3 cents, respectively. In the year-ago quarter, KKD stock matched forecasts. On the miss of 3 cents, revenues beat expectations.
Krispy Kreme Doughnuts hasn’t had a blowout quarter in over a year, but Wall Street brokerage firms have three “strong buys” and three “buy” ratings on KKD stock. A “strong” quarter with raised guidance might have the analysts pounding the table and reiterating their love and bullishness for Krispy Kreme. It could also send short-sellers scrambling if KKD stock pushes $19-$20.
An earnings miss along with lowered guidance, however, could validate my personal price target, which is in the mid- to low-teens for Kripsy Kreme stock.
I think the KKD needs to have solid back-to-back quarters before opening new stores. To this respect, I have also talked about the cat-and-mouse game Krispy Kreme Doughnuts has played with Wall Street by lowering its range guidance over the past year.
As far as the technical outlook, KKD stock has been in a tight range of $17-$17.50 since mid-May. This usually translates into a massive move for a stock. A 10%-plus move from current levels would have shares pushing $19 or testing $15.
I have recommended two put option trades on KKD this year that generated gains of 100% and 47%, respectively.
I use both technical and fundamental analysis for all of my trades, as it helps me get a better picture for an option (or stock) trade. Although volatility is elevated going into the earnings announcement, I have found a great risk/reward setup to play a possible test to $15.
The KKD Jul $16 puts would easily double and could return 100%-150% if shares test $15. The options would be “in the money” by $1 if KKD trades down to $15.
The KKD Aug $16 puts also look tempting and would allow even more time to play a possible drop below $15.
Additionally, the KKD Jun $16 puts are appealing, but these options expire next Friday. If KKD says good things about its doughnuts, shares could rebound to push the upper-teens. If so, these options will get crushed and would likely expire worthless.
The aforementioned July and August put options would still take a hit if shares clear their major moving averages and test $19-$20. However, there would still be some time premium left. So, the losses would be less and the position could be left “open.”
If shares do test resistance on good news, the longer-term options could still be left open to see if the rebound fades.
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