Krispy Kreme Doughnuts (KKD), Starbucks Corporation (SBUX): Is It Too Late To Buy This Year’s Top Turnaround Stock?

International markets will be a big part of Krispy Kreme Doughnuts (NYSE:KKD)’s expansion strategy, with management aiming to increase its franchised international store count to 900. That includes expansion into the high-growth Asia markets, where Krispy Kreme is on schedule to open its first location on the continent in October with a 1,200-square-foot flagship store in Singapore that lets customers watch doughnuts being made. Krispy Kreme is also seeing strong results in Europe, with its first store in Scotland selling close to 5 million doughnuts in its first six months of business.

But don’t think this is a replay of the company’s first attempt at growth, where management was overly aggressive and optimistic. Krispy Kreme Doughnuts (NYSE:KKD) emerged from the financial crisis with a more realistic and conservative approach to growth and financial management that will help it better execute that more realistic expansion strategy.

Krispy Kreme Doughnuts (NYSE:KKD) will also benefit from a huge rebound in its financial profile. After flirting with bankruptcy little more than four years ago, Krispy Kreme ended its 2013 fiscal year with cash and equivalents of $66 million and no long-term debt. That will give the company plenty of financial flexibility to execute its expansion strategy and navigate economic volatility.

Looking forward, analysts are bullish on Krispy Kreme Doughnuts (NYSE:KKD)’s expansion strategy, calling for earnings growth of 35% in fiscal 2014 and annual earnings growth of 30% in the next five years.

Risks to Consider: Rising commodity costs are a big threat to quick-serve restaurants. Krispy Kreme actively hedges its commodity exposure with derivatives, but that led to the company absorbing a $400,000 loss in the second quarter. Although that was a one-time write-down, ongoing volatility in agriculture poses a threat to margin strength. Krispy Kreme has also cited rising health care costs as a long-term headwind.

Action to Take –> Krispy Kreme is one of the biggest turnaround stories in the past five years, successfully rebounding from near bankruptcy during the financial crisis. And now, the company is stronger and smarter than ever, with plans to almost double its global store count in the next four years. Shares recently fell 17% in one day after a small earnings miss, but that helped sweeten the valuation, returning to a forward P/E (price-to-earnings) ratio of 29 times that’s in line with its 10-year average. That makes Krispy Kreme a buy anywhere under $21 and in position for big long-term gains.

P.S. — Predictions of a Krispy Kreme turnaround would have seemed outlandish in 2009, but investors bold enough to stick with the doughnut maker have been rewarded with huge gains. If you’re looking for next year’s boldest calls today, you should read our latest report, “The 11 Most Shocking Investment Predictions of 2014.” Our previous predictions have returned up to 310% gains in a year. To hear our latest, including how Apple’s next breakthrough could kill the traditional bank, click here.