Certainly don't think KREM is a crap nor turd.
I would agree, it actually seems to be a decent company, just way, way overvalued. They need to grow their earnings at about 100% per year forever to justify their current market cap. They might be able to do that for a year or two, but the world will only eat so many donuts, and as unique a product as they have, they are not immune to competition - and you can be sure Dunkin Donuts is not going to go down without a fight.
Normally I don't short on valuation unless I think there is a reason why the valuation can't be sustained. In this case the lockup is the reason to short it, and I have very little doubt that the short will ultimately be successful.
The lead underwriters, Deutsche Bank, structured this deal in a way that really restricted the insiders much more than usual - because this is not a tech stock that will take over a sector and earn a 100 billion dollar market cap because it really has the potential to change the world. It's a fast food concept stock that will eventually settle back to a PE of around 20, give or take, and even that only assuming it's very successful.
The IPO structure suggests that the underwriters really expect the insiders to dump as soon as they possibly can - it's actually quite rare to find an IPO where no insider shares whatsoever are registered. A little like wearing belts and suspenders, but good insurance by the underwriter of a successful IPO.
IMO this stock was successful largely because it's one that Joe and Martha America can relate to. I'll bet there are lots of odd-lot holdings in small accounts held by blue collar workers. KREM has long recognized that this is its primary market, and even though it's developed somewhat of a cult following in other segments, that's not their bread and butter, and they know it. The store location choices reflect their understanding of their market.
I underestimated the power of Joe and Martha to drive the price. You, perhaps, did not, which was a good call on your part. Joe and Martha don't care about PEs and present value of future cash flow and stuff like that. And as long as the float is 3 million (actually a bit less because up to 15% of that 3 million may be locked up) and the buyer profile is small-time, there will be nothing to drive it down but the short-sellers. And so much of the float is already short that there isn't even any more of that.
Only the end of the lockups, starting in October and continuing through early next year, will lead the stock back to where it ought to be. As long as it keeps going up, Joe and Martha aren't going to sell, if anything they will buy more. But once shares start trading, watch out. There's huge pent-up demand for borrows for short sales, so every share that is sold by insiders will really be sold twice. Assuming insiders sell in any volume, Joe & Martha aren't going to know what hit them.
Regards,
Fund |
