I remember Krispy Kreme (NASDAQ:DNUT) stock from more than a decade ago. Back then their products were an absolute mania. Those donuts had their extreme fans and they were avid. Nevertheless, the old KKD stock went extinct from Wall Street.
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Now they are making a comeback. This is their second go-around with it and so far the response has been underwhelming.
After a wide range on day one, DNUT stock fell 41% from high to low. It has since recovered 30% from that but it is still below the halfway mark. The bulls have their work cut out for them too early. The honeymoon period ended before it began.
Now, from a technical perspective, they must defend the $15 level at all cost. Losing that would make the recovery process much harder than it needs to be.
Currently, anything above $17 has proven difficult to overcome. The stock has failed there since July 13. This doesn’t bode well for the near term, therefore, onus is on management to convince investors otherwise.
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The financials for Krispy Kreme are still too new to gauge. However, total revenues suggest that they are on a growth path. They’re still not profitable but it’s too early in the process to ask that.
DNUT Stock Is Struggling, But Has Hope Source: Charts by TradingView
There is a bit of good news in that they generate $30 million in cash flow from operations. They are not hemorrhaging in order to do business. This allows management to continue executing on plans as they gain investor confidence.
What is concerning is that the stock market has never been stronger. This is a great window of opportunity for a new stock to jump into the stream. DNUT stock has failed so far but it’s too early to count it completely out. Caution is necessary because the sellers are in control.
There are two approaches to the stock at this time. The first is good old long-term investment to buy and hold it for years. This is an easy decision where the only variable is size. To that I would suggest that taking partial positions makes sense at first. This leaves room for error if tougher times are coming.
The other is to actively trade the stock with shorter time frames. There are clues for that from the recent history. I expect buyers to try and hold $15.50, which has been pivotal of late. Losing that would mean revisiting the lows, or maybe even lower. Conversely, breaking out from $17.50 would invite momentum buyers.
This gives active traders a box with two edges. They can trade DNUT stock inside the box limits. Then they can also chase the breakouts from either sides if and when they happen.
Discipline Is an Important Ingredient
Regardless of the method, investors and traders should employ discipline. The first rule in this kind of market is that conviction is fleeting. I am always open to being wrong, therefore I don’t dig my heels in often. If it is an investment then I manage by learning more about the company progress. If it is a trade then I would deploy my trading rules. Like I wouldn’t average down, and I would book profits often and quickly.
Since I don’t know enough about this new company fundamentals, I check out what the experts think. According to Yahoo finance, the average price target from the analysts who cover it is $21 per share. This leaves room for upside potential in theory.
When a stock is this new, it is necessary to make assumptions. Without them there would be no trading. The investors who are in DNUT stock for the long term must assume that management is competent. The economy is healthy – in large part to the government’s intervention.
However, some of those artificial tailwinds are on schedule to disappear starting this year. There might be tougher times ahead, hence the suggestion of taking partial trades. Averaging down into an investment makes sense. Doing so in a trade usually ends up turning it into an investment. This is OK as long as the investor is doing so consciously. Otherwise it’s a tactical mistake that leads to heartache.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.