Why Krispy Kreme Rallied Today

Key Points

• FBI director Kash Patel touted Krispy Kreme during a congressional hearing yesterday.

• The stock reacted strongly, likely due to a short-squeeze egged on by meme stock investors.

• Krispy Kreme's turnaround plan remains far from certain.

• 10 stocks we like better than Krispy Kreme ›

Shares of donut manufacturer Krispy Kreme (NASDAQ: DNUT) rocketed 15.6% in Thursday trading.

There wasn't any company-specific news from Krispy Kreme today -- although on Monday the company did unveil its "Fall Fair"-themed donuts for the holiday season. Rather, Krispy Kreme got a lift from an unlikely source: FBI Director Kash Patel.

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Meme investors cash in on Kash's comments

Patel appeared before a Congressional hearing yesterday, which was mainly related to other matters. However, during the hearing, Patel was asked about government officials holding stocks. Inevitably, Patel's portfolio came up, with Patel mentioning that he saw a good investment opportunity in Krispy Kreme.

While Patel had already disclosed months ago that he had taken a stake between $15,000 and $50,000 in Krispy Kreme, apparently the comments yesterday alerted certain investors to his holdings. And since filings on buys and sells are disclosed with a delay, it was unclear if Patel still held the stock.

The outsize move on that little bit of news was likely due to meme stock investors buying the heavily shorted Krispy Kreme stock, perhaps sniffing out a possible short-squeeze. As of Aug. 29, 23.1% of Krispy Kreme's float was sold short, which is a high number.

Krispy Kreme has certainly had its challenges this year, so the skepticism is warranted. However, Warren Buffett once said, "You pay a high price for a cheery consensus." So if Krispy Kreme can find a way to turn things around, there is a lot of potential upside.

Image source: Getty Images.

Krispy Kreme's turnaround plan bears watching

Investors should never invest in a stock just because a famous investor has, let alone someone working in the government in an unrelated role to markets. That being said, Krispy Kreme did recently announce a turnaround plan with a big focus on cost-cutting and outsourcing logistics.

But to truly get the stock moving again back toward its highs, Krispy Kreme will have to get revenue growth growing again. While lower interest rates could boost consumer spending, Krispy Kreme doesn't exactly align with healthier eating trends of the current generation. So, the stock remains a high-risk lottery ticket at this point.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.