Why Krispy Kreme Rocketed Higher Today

Key Points

• Meme stock fever appears to have come back into the market over the past couple of days.

• Meme traders target heavily shorted stocks in hopes of generating a squeeze.

• The beaten-down Krispy Kreme appears to be a current meme stock favorite.

• 10 stocks we like better than Krispy Kreme ›

Shares of doughnut-slinger Krispy Kreme (NASDAQ: DNUT) rocketed 26.7% in Tuesday trading, after the stock appears to have been caught up in a new round of meme stock fever.

Meme stocks are beaten-down stocks with a high short interest, which retail investors on message boards such as Reddit target for purchase in hopes of generating a short squeeze.

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Krispy Kreme, along with several other names, is soaring today as part of a current meme stock cohort, it seems.

No news and a 26% gain is a dangerous combination

There wasn't any new news to speak of regarding Krispy Kreme. In fact, the most recent news hasn't been good at all.

Back in May, the company's first-quarter report was rather dismal, leading the company to cut its dividend and end its partnership with McDonald's, which proved to be unprofitable for Krispy Kreme. The company's debt has grown to $935 million, and the doughnut maker is unprofitable on a generally accepted accounting principles (GAAP) basis in the wake of softer-than-anticipated demand this year.

As a result, Krispy Kreme's short interest had increased to 14.2% of shares outstanding, but a higher 26.4% of its publicly traded float, as of June 30.

That's a high-enough short interest, especially in a lower-float stock, to cause a big move on a surge of unexpected buying. And it appears meme stock traders happened to target Krispy Kreme today.

In addition to Krispy Kreme, it appears beaten-down, scandal-plagued retailer Kohl's (NYSE: KSS) was also a meme trade target, with that stock up 38% on the day as well.

Image source: Getty Images.

Meme stock trading isn't for the faint of heart

For those tantalized by the massive gains in a short amount of time, please realize that meme stock trading is highly risky, and that the quick gains of today can fade just as quickly.

At the Motley Fool, we preach long-term investing in high-quality companies, a strategy that has shown long-term outperformance without the risks, headaches, and taxes inherent in trying to time volatile short-term trades on lower-quality stocks.

So unless you are a meme investor by trade, I'd recommend staying away from Krispy Kreme unless you think a genuine turnaround at the business level is within sight. As of now, that turnaround isn't anywhere to be seen.

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Billy Duberstein and/or his clients has 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.