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Krispy Kreme Stock Finds Its Sweet Spot Again

NEW YORK (TheStreet) -- Krispy Kreme (KKD - Get Report) has found its sweet spot again.

Two months ago I was convinced there was more downside for the doughnut maker. I was right.

Management had stunned investors with a one-two punch -- missing earnings and guiding down full-year estimates by 6%. The way I saw it, it only made sense for investors to wait for a corresponding 6% pullback, suggesting a buy target around $15 per share. The stock (then) traded at $16.19.

Last week patient investors were rewarded. Shares bottomed at $14.82. I say "bottomed" because there was still the chance that Krispy Kreme would qualify as a falling knife.

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At around $16, shares are up roughly 10% from that 52-week low but down 16% on the year to date. The recent 10% spike is a strong indicator Krispy Kreme has seen the worst.

At current levels, the stock is trading at just 18 times 2015 estimates of 87 cents per share. This multiple is four points lower than the industry average P/E. By comparison, rivals Dunkin Brands (DNKN) and Starbucks (SBUX) are trading at forward P/Es of 21 and 24, respectively.

Krispy Kreme is being discounted for one reason only -- its earnings miss and downward revision. The good news is Krispy Kreme doesn't have any more weather-related impacts to worry about. Assuming that management can meet or exceed its full-year net income target of $51 million, investors are looking at  attractive comparable-store sales heading into next year. Recall, the prior high range was $55 million.

Wall Street is only looking for full-year 2014 earnings per share of 73 cents. Given management's recent cost-cutting efforts and margin improvement, 75 cents to 78 cents is not out of the question. So at around $16 per share, now is the best time to get back into Krispy Kreme because the stock has a strong shot of hitting $20 in the next six to 12 months.

Krispy Kreme CEO Anthony Thompson took office effective June 1. Thompson's record as a strong detail-oriented manager of Papa John's International (PZZA), leading the company against larger rivals Dominos (DPZ) and Pizza Hut, should help Krispy Kreme emerge out of the shadows of Starbucks and Dunkin.

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