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When the Internet bubble broke last spring, it didn't really burst like a balloon -- one big bang and the pain was over. Rather, it was more like a dam breaking, with capital flowing out of the high-tech sector in a spring flood. Now the gush has slowed to more of a trickle as the remaining dollars turn to, well, doughnuts.
That's right, doughnuts.
As we've watched the Net-stock collapse at Business Week Online over the past several months, we've often speculated about what an investment in a most non-dot-com IPO this year might be doing compared to money put into some of the once-high-flying Net stocks. We found our candidate for comparison right on the conference table for many of our morning edit meetings: Krispy Kreme Doughnuts.
Bingo. Krispy Kreme Doughnuts (
KREM
) sold shares to the public for the first time on Apr. 5 at $21 a share. Even though it's off its peak of over $103 in September, at its Oct. 19 close of just under $90, Krispy Kreme has racked up a 328% gain since going public.
BIG NAMES. Figuring investors love to monitor benchmarks almost as much as they love scarfing doughnuts, we've come up with a way to track the doughnut stock vs. the Net stocks. We call it the KREMEY, for the Krispy Kreme Euphoria Yardstick. The KREMEY is intended to measure the onward progression of the Internet meltdown by comparing a stock that began to swell just as the values of a basket of 10 premier dot-coms started heading south. We filled our Net-stock basket with a bunch of high-profile consumer dot-com names: Amazon.com (
AMZN
), America Online (
AOL
), eBay (
EBAY
), eToys (
ETYS
), E*Trade (
EGRP
), CNET (
CNET
), iVillage.com (
IVIL
), Priceline (
PCLN
), TheStreet.com (
TSCM
), and Yahoo!(
YHOO
).
Remember that 328% gain since Apr. 5 for Krispy Kreme? In contrast, our KREMEY index of Net powerhouses has plunged 56% during the same period. Put another way, an investment in 10 shares of each of our 10 Internet stocks on Apr. 5 would have cost you just about $5,400 -- and left you holding just $2,379 today. But if you were lucky enough to have put the same $5,400 into 257 shares of Krispy Kreme at the offering price, you would have turned that stake into $23,130 today (see table below).
Why compare Internet stocks and a doughnut company? Sure, we could trot out lots of smart-alecky similarities about hot air, empty calories, and a honey glaze. "There is the concept of the sugar high," says Peter Cohan, whose Marlborough (Mass.) firm consults companies on Internet strategy. "I feel they have that connection." But the comparisons aren't all silly.
A DOLLAR A DOUGHNUT. Krispy Kreme and our group of Net stocks do have some legitimate points of comparison. After all, consumers love the products these companies put out, and investors clamoring for a limited number of shares fueled the unprecedented gains in these stocks. That dynamic drove valuations in all of them to equally ridiculous levels. Look at Krispy Kreme. Given the company's current $1 billion market cap and projections that it'll sell 1 billion donuts this year, investors are valuing each of those doughnuts at $1. Not a bad premium, considering the doughnuts retail for about 85 cents each.
Deutsche Banc Alex. Brown analyst John Glass is quick to point out that Krispy Kreme is currently selling at a one-to-one "price-to-donut" ratio. "The stock is unbridled by traditional valuation metrics," Glass says, adding that he has "given up" trying to come up with a price target.
But a word to the wise. If you've gotten heartburn investing in Internet stocks, your stomach won't necessarily be calmed by grabbing Krispy Kreme stock. As Business Week columnist Robert Barker shows in the Oct. 30 issue, there may be good reason to stay away from Krispy Kreme's high-flying shares in the near term. (see "Krispy Kreme: A Dozen Hot Questions").
JUST ONE BITE. Truth is, far more separates the Internet and Krispy Kreme than joins them. For starters, the Net has created a new medium that's radically changing how people communicate, shop, and do business. Krispy Kreme, on the other hand, is an old-fashioned doughnut company, doing what little it does for more than 60 years.
Still, the company expects to earn $1 a share this fiscal year, up from 61 cents the previous year. And it's on track to increase earnings to $1.25 a share next year. That's pretty decent for a doughnut company headquartered in Winston-Salem, N.C., that hasn't had to spend millions on marketing its products. Aficionados will tell you with glee that all it takes is one bite and you're hooked. But let's face it. Making doughnuts is hardly an enterprise that will revolutionize society.
Glass makes another interesting point: Part of the Krispy Kreme brand's mystique has to do with nostalgia. It's like eating ice cream. Suddenly, adults turn into children again when they bite into a sugary doughnut. Even the logo hearkens back to a simpler time and place, Glass says. In contrast, the Internet is an investment in the future. Maybe all those bruised and battered Net investors are finding solace nowadays in Krispy Kremes, the stock as well as the snack.
What's clear is that Krispy Kreme would have made a great hedge against the Internet meltdown. Now that's an idea. Maybe investors holding on to lofty Krispy Kreme shares should now turn to the downtrodden companies in the BW Online KREMEY for some protection. Stay tuned for more updates.
An Apr. 5 investment of $5,400 in:
Today would be worth:
Gain/loss:
Gain/loss percentage:
Krispy Kreme stock (KREM)
$23,130
$17,730
328%
The KREMEY
$2,379
-$3,031
-56%
The KREMEY comprises 10 shares each of Yahoo! (YHOO), Amazon (AMZN), TheStreet.com (TSCM), eBay (EBAY), Priceline (PCLN), CNET (CNET), E*Trade (EGRP), eToys (ETYS), iVillage (IVIL), and America Online (AOL). Here's how they've done individually:
Ticker
Apr. 5 Share Price
Shares
%of Total
Current Value of 10 Shares
Gain/Loss
Gain/Loss %
AMZN
$62.00
10
11.7%
$277.50
-$342.50
-55.24%
AOL
$63.00
10
19.1%
$454.40
-$175.60
-27.87%
CNET
$44.00
10
8.4%
$199.40
-$240.60
-54.68%
EBAY
$83.00
10
24.0%
$571.90
-$258.10
-31.10%
EGRP
$24.00
10
6.1%
$145.00
-$95.00
-39.58%
ETYS
$8.00
10
1.6%
$37.50
-$42.50
-53.13%
IVIL
$13.00
10
0.6%
$14.40
-$115.60
-88.92%
PCLN
$72.00
10
2.2%
$51.30
-$668.70
-92.88%
TSCM
$7.00
10
1.3%
$31.90
-$38.10
-54.43%
YHOO
$165.00
10
25.0%
$595.60
-$1,054.40
-63.90%
Total
$2,378.90
-$3,031.10
-56.03%
Stone is an associate editor at Business Week Online and Shook covers financial markets for BW Online in New York Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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