The details of my Big Bet against Krispy Kreme - Page 4

derosnec · #31 04-12-2006, 04:18 PM

John, I'll post some things he can do (probably tomorrow).

Sniper · #32 04-12-2006, 04:23 PM

Paluka, I don't think Cat believes this is as much of a longshot as you imply.

poker1O1 · #33 04-12-2006, 06:05 PM

[ QUOTE ]

49 KKDQU ($7.50 May) bought at 35 cents, cost $1,715
50 KKDTU ($7.50 Aug) bought at 85 cents, cost $4,250
50 OKKMA ($5 Jan 07) bought at 45 cents, cost $2,250
9 OKKMZ ($2.5 Jan 07) bought at 15 cents, cost $135
20 YRDMA ($5 Jan 08) bought at $1.15, cost $2,300

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I only have time to do the bolded option, but the only option here I would even consider is the 2nd one. Looking at the bolded option only, the stock would have to fall below $7.09 in order for buying the put options to be more profitable than shorting the stock. The last three are really just feelings, but based on this it's only even skimmed $5 for a short period over the last 2 years.

Sniper · #34 04-12-2006, 06:09 PM

Read the analysis thread for more info on why he structured his trade this way.

Also, shorting the stock, rather than using options, would require the use of much more capital.

DesertCat · #35 04-12-2006, 06:39 PM

A few responses to todays comments

1) I don't believe in the risk reward ratio of shorting. And even if I did I doubt I could cheaply short KKD, I think the short interest and cost is very high.

2) I don't have any risk management because I don't see any way to cheaply hedge my risk. If KKD actually has enough liquidity to avoid going bankrupt, and it has a real path to profitability, it's still going to be a long time before it's even worth todays price ($700M-ish enterprise value). So the idea of buying some OTM calls doesn't seem very useful.

3) The May options expire three weeks after KKD is forced to file 2005 financials. We are going to find out a great deal, at that point, and it's likely to be bad news. KKD's trading history has no bearing on how it will trade after this news, if I'm right it's not going to "skim" $5, it's going to plunge right past it.

Paluka · #36 04-13-2006, 10:49 AM

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Paluka, I don't think Cat believes this is as much of a longshot as you imply.

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I wasn't commenting on how much of a longshot it was. I have no opinion. I just think that saying this trade is particularly risky is silly. Betting on underdogs is always risky, because you usually lose. But the rewards when you win are very high.

DesertCat · #37 04-13-2006, 01:20 PM

An update. It appears (from comments by KKD's PR person) that if KKD files financials this month, it will be for FY 2005 and previous. I believe their FY ends in January, and FY 2005 actually refers to Calendar 2004.

So this would mean they'll still be 15 months behind, and we won't be getting any details on how their lower sales have affected net margins, and how bad their financial situation is now. I expect they'll provide quarterly gross sales numbers like they did in december that will show further sales declines.

This isn't good news for my May and August options. The market for KKD stock exists now in an intersection of magical possibilities, of either a great brand turning back into a powerful growth stock, or falling into a black hole filled with losses, liabilities and lawsuits. This report seems unlikely to narrow the range of possiblities for most market participants. The calendar year 2004 financials are likely show the business was dramatically weaker than was publically reported, so that's a start. But it's iffy if that will be enough to drive the price down far enough.

I'm still holding these options until the report. I expect them to report on their available liquidity, there could be some awfully bad news there. And if they don't file on time, their excuses and a possible delisting might be all the bad news I need.

Oh, and some Kuwaitis just bought 6% of KKD. I'd love to know why. If anyone knows of any positive analysis on KKD, I'd love to read them to contrast with my thesis.

buffett · #38 04-13-2006, 01:35 PM

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If anyone knows of any positive analysis on KKD, I'd love to read them to contrast with my thesis.

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This, my friends, is one of the identifying marks of an intelligent investor.

Sniper · #39 04-13-2006, 03:58 PM

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Oh, and some Kuwaitis just bought 6% of KKD. I'd love to know why. If anyone knows of any positive analysis on KKD, I'd love to read them to contrast with my thesis.

[/ QUOTE ]

International expansion?

DesertCat · #40 04-13-2006, 04:58 PM

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International expansion?

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That's one possibility. I believe the Kuwaiti investors have a history of restaurant franchise investing. And supposedly UK is opening new stores (though I find that puzzling when they are also up for sale). But if KKD can tap international investors to open new stores, that provides KKD with more cash flow now, even if the new stores fail in three years.