Another Bite Out of Krispy Kreme

Lacking dough and sticky with scandals, Motley Fool Stock Advisor pick Krispy Kreme Doughnuts (NYSE: KKD  ) already teeters on the brink of bankruptcy. This morning, the Feds piled on. Krispy Kreme revealed in a press release issued shortly before the market opened that the U.S. Attorney's office for the Southern District of New York has begun an investigation and is seeking to interview current and former officers and employees.

I give the company credit for not sugarcoating the news. Investors, however, don't seem to care. They're tossing the stock faster than a stale glazed lemon-filled, sending the shares lower by nearly 10% as I write this. But why? I mean, really, if you've hung in through the SEC probe, what makes this one any different? The company isn't saying what the U.S. Attorney is investigating. The only details are that the new probe is likely related to the SEC inquiry. Ooooh, scary.

Seriously, folks, it's exactly when investors start the "where there's smoke" panic-selling that I start to get interested. Don't get me wrong: I still don't buy the argument that Krispy Kreme is the next Starbucks (Nasdaq: SBUX  ) . Heck, I don't even like the original glazed all that much. But I've seen how it makes others crazy with sugar-induced lust. That's the mark of a good mix of products. It was the icky management that prompted me to wish the company had remained private.

So is now the time to buy the stock? No. Krispy Kreme has already intimated that there's a chance a cash crunch could force a bankruptcy filing. If that were to happen, the more than 60 million shares outstanding could end up worthless. The stock remains too risky until we know for sure whether the firm will, or won't, go into hock.

Now let's say for a minute Krispy Kreme doesn't file for bankruptcy. The balance sheet is in terrible shape, to be sure, but there's enough cash on hand to cover what appears to be at least two years' worth of interest. Plus, there's more than $284 million in property on the books. If management can get up the guts to kill poorly performing stores, sell off unneeded assets, and begin paying off debt, then, suddenly, Krispy Kreme becomes a little like that chocolate eclair that Seinfeld character George Costanza famously devoured after plucking from the trash: loathsome to most, but a tasty treat for the bold. Frankly, that's the way it sometimes goes in investing. One person's garbage might be your gourmet dinner. But first you've got to have the guts to take a bite.

For related Foolishness:

  • Do you think Krispy Kreme's crash diet will work?
  • The old CEO is out; should investors get back in?
  • Relive the sad tale of Krispy Kreme, if you dare.
  • At least one Fool thinks doughnut maker's fair value is zero.

Motley Fool Inside Valuechief analyst Philip Durell is a trash digger. Don't worry, he considers that a compliment. His sifting through the market's rubbish has led to outsize returns for his subscribers. To get in on the Dumpster-diving action take a free, 30-day trial to Inside Value. Your portfolio will thank you.

Fool contributor Tim Beyers occasionally hankers for a good jelly doughnut. Battling the munchies in your quest to shed a few unwanted pounds? Find others like you at the Fools Fighting Fat discussion board. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.


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