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Krispy Kreme Doughnut's Sweet Comeback

Stocks in this article: KKD

NEW YORK ( TheStreet) -- As a value investor, I sometimes buy companies that have been in distress, faced rough times, and have been all but abandoned by the market.

In these situations, which are fraught with risk, I am presuming that there will be a turnaround of some sort and/or that the markets will realize that there is value to be realized. Some call it garbage-picking or dumpster-diving, but when you are right, the rewards can be substantial.

Krispy Kreme (KKD) is a great example. Here's a brand that has been around since 1937 but did not go public until 2000.

You've heard this story before. KKD was a cult stock that more than quadrupled in value between the IPO and the end of 2001 before overexpansion, bad management and poor accounting nearly sunk the ship.

The doughnuts themselves were never forgotten, but KKD as a stock soured, falling from $49 in the summer of 2003 to about $4 in the fall of 2005, and to a little bit more than $1 by early 2009.

KKD Chart KKD data by YCharts

I stumbled onto KKD in early 2010. While busted cult stocks are not typically in value investors playbooks, this one caught my eye. After several money-losing years, the company broke even for 2010, and it appeared as though it had cleaned up its act.

Stores had closed over the years, debt had been paid down, and the company was expanding again. But this time, a lot of the growth was international.

While not the classic value story, I saw great value in the brand name itself wrapped in a package with a small $300 million market cap, and took a position.

After three consecutive years of profitability, other investors are beginning to embrace KKD as well.

While there was not much good news in the markets this past Friday, KKD shares were a bright spot, rising more than 21% to $17.32, on eight times normal average volume.

The company put up better-than-expected first-quarter numbers after market close on Thursday, beating on revenue ($120.6 million vs. expecations for $117 million) and earnings (20 cents vs. 16 cents). Revenue rose a solid 11.2%, and this represented the 18th consecutive increase in same-store sales at company-owned stores.

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