I’ve decided to close out my Dunkin Donuts (DNKN) short recommendation for a 14% gain in four months.
When the company reported lower than expected revenues and decreased its guidance last week, the market reacted strongly, sending the stock down 5%. The slowing growth confirms my bearish thesis on DNKN from March.
We made ourselves and clients a considerable amount of money on this position. At this point, we have other high conviction short ideas to which we are allocating capital.
In other words, DNKN no longer makes our short list though we still consider it a Dangerous stock and would recommend investors avoid it. Updating our DCF analysis to reflect DNKN’s lower price and quarterly results, we see that DNKN must grow NOPAT by 7% compounded annually for 20 years in order to justify its valuation of ~$43/share. Those are very high expectations that we do not believe the company will meet.
At the same time, digging through their quarterly filings we found some data that investors might extrapolate into good news. We prefer to avoid the risk of the impact their unfounded enthusiasm may have on the stock at this time.
In the short to medium term though, we do not expect another nice drop in the price as we saw recently.
Sam McBride contributed to this report.
Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, or theme.
Feature Photo Credit: Jeepers Media (Flickr)