The details of my Big Bet against Krispy Kreme

[adios]

Now where did I state that nobody could consistently find undervalued or overvalued stocks???????????????????????????

[hawk59]

Isn't that what part C of the bold statement implies? I realize you didn't write it, but just copied it in.

[DesertCat]

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Now where did I state that nobody could consistently find undervalued or overvalued stocks???????????????????????????

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You asserted that KKD is efficiently priced. What evidence did you use to come to that conclusion?

[Sniper]

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Now where did I state that nobody could consistently find undervalued or overvalued stocks???????????????????????????

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(c) If the deviations of market price from true value are random, it follows that no group of investors should be able to consistently find under or over valued stocks using any investment strategy.

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FWIW... C is a contradiction... DUCY?

Also, just because you read something, doesn't mean its correct!

[Sniper]

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BTW KKD was up big time today.

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And what piece of information diseminated in the last 24 hours, do you think accounted for today's 9% randomly "efficient" move in the stock price?

[cookmg]

As someone trying to learn from the discussion in this thread, could some of the nay-sayers elaborate on why they think that KKD is fairly valued. Cat has provided a very detailed explanation of why he doesn't think the underlying business supports the market price. What specifically is incorrect in his analysis? What is the fundamental support for the current price level? If the current price is just a product of shorts covering, does this effect usually subside? Over what timeline?

Also, Cat, do you agree that your position on KKD is a speculative one in spite of your thourough analysis? Does the limited time horizon of options imply that any position is speculative--regardless of research--since you are in a way trying to predict when the market will realize the true value of the business?

[DesertCat]

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Also, Cat, do you agree that your position on KKD is a speculative one in spite of your thourough analysis? Does the limited time horizon of options imply that any position is speculative--regardless of research--since you are in a way trying to predict when the market will realize the true value of the business?

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Sure, it's somewhat speculative. That's why most value investor positions are longs, you can afford to hold as long as necessary until the market recognizes true value. For dividend paying stocks you actually get paid to hold the position.

In my case I'm paying "rent" on these positions for relatively short time frames. But I'm also not heavily invested here. Depending upon how KKD's year goes, I'll be willing to buy more options later this year and next year. When these positions have 4-10x in upside, that upside can pay for a lot of expirations. If I was putting 10% of my portfolio in this , I couldn't reload that every year. But since it's less than 5% I can handle the costs indefinitely as I can easily make it up elsewhere.

[Sniper]

KKD Short Interest...

April 13: 24,105,175
May 15: 22,770,525

[DesertCat]

Interesting news on Krispy Kreme Australia.

The interesting part is that KKD is relying on KK Australia raising new equity so they can pay KKD around $8M before the end of May.

"On November 30, 2005, Krispy Kreme International, Ltd., a wholly-owned subsidiary of KKDC, sold its 35% equity interest in Krispy Kreme Australia Pty Limited (“Krispy Kreme Australia”), our area developer in Australia and New Zealand, to KKA Holdings Pty Ltd (“KKA Holdings”), the majority owner, for approximately $2.5 million. Pursuant to the purchase agreement, we also agreed to sell our existing shareholder loans in Krispy Kreme Australia to KKA Holdings on or before May 30, 2006 for approximately $3.7 million. Our approximately $4.4 million guarantee of Krispy Kreme Australia’s debt is expected to be released on or before May 30, 2006."

They also agreed to sell their UK stake for $5.6M, a while ago.

"n December 2005, the Company entered into a term sheet with the majority owner of Krispy Kreme U.K. Limited (“KK UK”) setting forth the basis of a proposed sale by the Company, for $5.6 million in cash, of the Company’s 35% equity investment in and notes receivable from KK UK. A condition to the completion of the proposed transaction is a release by KK UK’s lenders of all guarantees by the Company of obligations of KK UK and a termination of an equipment repurchase agreement relating to KK UK. There is no assurance that the transaction will be completed."

The UK sale apparently has not closed yet, and it's been 6 months. Why are these two seemingly unrelated events so interesting? Well it relates to KKD's liquidity position. In their last 10k they said.

"The Company believes that it will have sufficient access to credit under the Secured Credit Facilities to continue the restructuring of the Company’s business, and that it will be able to comply with the covenants contained in such facilities. The financial covenants contained in such facilities are based upon the Company’s fiscal 2007 operating plan which includes, among other things, anticipated sales of certain assets and reductions in the amount of indebtedness and other obligations of franchisees guaranteed by the Company."

This says they are depending upon asset sales to maintain sufficient liquidity. Now one sale went through in the U.S. for $10M. But they look to fall about $9.3M short on the UK/Australia deals, plus be on the hook for $4.4M in debt they thought would go away. This could be a significant hit to their available cash.

"On April 17, 2006, the Company announced that, as of January 29, 2006, based on preliminary data, it had approximately $18 million of net borrowing capacity under these facilities (excluding amounts that could be borrowed to repay existing debt and based on the most restrictive covenant)."

They are required to maintain $20m in net liquidity or their loans can be called. It's unclear how much cash on hand they have, in November it was $27M.

[hawk59]

DC,

What is your take on Al Kharafi & Sons? Some are worried about what this means for the shorts.