EOT Trade Alert – December 2, 2011

| December 2, 2011

December 2, 2011

Trade Alert:

   Buy DNKN March 2012 $22.50 Puts at $2.00 or better

Company Background:

Dunkin’ Brands Group (DNKN) owns, operates, and franchises quick service restaurants under Dunkin’ Donuts and Baskin-Robbins brands.

Short-Term Catalyst:

DNKN is one of the year’s most closely watched IPOs.  Shares were offered on July 27th at $19 and surged 68% in the first week of trading.  But that’s where the good news for DNKN ends.

Since then, DNKN has been trending steadily downward.  And it’s about to get worse…

You see, three private equity firms still own 75% of the company.  And they’re clearly not watching out for shareholders interests.  In fact, the firms are cashing in at the expense of unsuspecting shareholders.

It all started before the IPO.  The private equity firms added $500 million in debt to the company’s balance sheet in order to pay themselves a special $500 million dividend.

Then they used a big chunk of the money they raised in the IPO to pay off the debt. The money they raised isn’t going to fuel growth or payoff real debt.  It was simply a way for them to suck money out of the business.

And it doesn’t end there…

A few weeks ago, DNKN announced a secondary offering of another 22 million shares. And guess what?  None of the proceeds from this offering will be reinvested in the business either.

Put simply, this offering is nothing more than another payday for the private equity firms.

I’ve got to ask…

If DNKN is such a great investment, why are the private equity firms selling out?  I think it’s pretty clear the private equity firms are getting out at the top.  (That’s what the smart money does.)

Not surprisingly, DNKN’s business just doesn’t look very strong.

For instance, same store sales growth is anemic at best.  And they have a huge debt burden that will limit their ability to expand into new markets.

And don’t forget, DNKN’s business is facing stiff competition from Starbucks (SBUX) and McDonald’s (MCD).

This looks like another hot IPO that’s destined for the scrap pile.  Let’s grab puts on DNKN now to profit as the smart money cashes out.

Trade Details:

Underlying Stock Symbol: DNKN
Current Bid-Ask Price: $1.70 – $1.85
Option “Buy Up To” Price: $2.00
Break-Even On Stock At Expiration: $20.50
Maximum Risk Per Contract: $200

Exit Strategy:

DNKN is trading at $24.64 per share.  Resistance levels will be at $27.50 and again at $29.  Remember, we want this stock to move lower.  Support levels will be at $20 and $19.  Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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